Recognizing the importance of sound ﬁscal positions for a monetary union, the Stability and Growth Pact focuses on mechanisms to contain the build-up of excessive levels of public debt at the level of individual member states. The European sovereign debt crisis has been a painful reminder of how important incentives to maintain sound public ﬁnances are.
But it has also shown that looking at the current levels of public debt might be insuﬃcient. In the wake of banking crises, and without credible mechanisms to restructure excessive private debt, governments might be forced to intervene. Private debt may then turn into public debt.