- seated tradition of stringent safeguards for private property and the legal system itself have further curbed redistribution trends in the us. even the united states ’ federal structure may have helped to restrict the role played by central government in budget policy. the eu member states ’ constitutions, on the other hand, tend more towards the principle of proportional representation, which some consider to be in favour of universal programs designed to benefit various groups and thus higher government spending. 25 it is common knowledge that, in an effort to avoid the pitfalls of unsustainable budget policies, the maastricht treaty and the 1997 stability and growth pact lay down the conditions necessary for safeguarding budget discipline within a monetary union. the pact ’ s underlying philosophy in the budget field is that countries must structurally pursue breakeven budgets or a budget surplus, in order to then allow automatic stabilisers to function without any restriction. this institutional setup, comprising constraints of an almost constitutional nature in the field of budget policy, is different from that in the united states where tax regulations are in some ways more flexible, although they have been much altered in recent decades. it has been repeatedly proposed to introduce a break - even budget rule in the united states, but it has not happened yet. another example of the importance assigned to discretionality over regulations in the united states can be seen in the fact that, while the overall debt is nominally subject to a ceiling approved by congress, that ceiling is in fact regularly modified, thus in actual fact it is not binding at all. for example, the deficit targets established in the 1985 budget and emergency deficit control act ( gramm - rudman act ) were abundantly breached and later relaxed. in light of this, the 1990 budget enforcement act ( bea ) introduced restrictions to the discretionary component of expenditure and ground rules designed to restrict spending to real revenue ; on the basis of those rules, any new discretionary spending ( apart from the legislation on social security and revenue ) was to have a neutral impact on the budget. thanks to this method, a positive budget balance was achieved and maintained for a certain amount of time under the clinton administration. yet the deficit ’ s disappearance proved short - lived ; negative balances were repeatedly recorded in the wake of the taxation and spending policies adopted by president bush ’ s administration. 3. 4. 2 the economic structure moving on to the deep - seated differences in economic structure, a crucial difference between the united states and the euro area lies in the far

with the sharp decline in sovereign bond prices – often associated with a rating downgrade of the respective sovereign issuer – government bonds were made subject to significant haircuts and their refinancing power declined. this has eroded the volume of collateral available in the form of government bonds and stressed the re - financing possibilities of banks. fourth, the re - pricing of government debt also had a direct negative impact on the asset side of banks and therefore on their own perceived riskiness. in fact, since 2009, we can see a close relationship between measures of bank and sovereign credit risk. this sovereign - bank nexus constitutes a fundamental impediment to resolving the crisis in the euro area. on the one hand, rising sovereign credit risk affects banks ’ credit risk via their exposure to government debt. this creates deleveraging pressure that may turn into disorderly dynamics characterised by fire sales. on the other hand, ailing banking sectors increase the burdens faced by governments. these two effects are mutually reinforcing and constitute a vicious circle. for the banks, the increase in their own credit risk makes their re - financing harder. in short, unsecured financing is hampered by the perception of increased bank riskiness while secured financing is undermined by the erosion of collateral. this can in turn become a major obstacle to granting loans to the real economy. as banks are the main source of financing in the euro area, this could seriously jeopardise the flow of credit to enterprises and households. what lessons have we learnt? these developments in the euro area sovereign bonds markets offer one clear lesson : financial markets are prone to exaggerations, which amplify further the pro - cyclicality inherent in asset valuations. usually, during “ good times ”, when risk appetite is strong and economic conditions are favourable, asset prices tend to be high and risk spreads tend to be low. however, financial markets tend to be over - complacent from time to time, especially after protracted periods that did not see any extreme events materialising. this tendency has probably led to an excessive tightening of euro - denominated yields in the run - up to the euro. in “ bad times ”, when the degree of risk aversion increases and gdp growth contracts, asset prices tend to decline and risk spreads rise. also in bad times, this standard pattern of procyclicality may be amplified by market exaggerations : investors tend to over - price certain types of risk and