Given the potential problems associated with fiscal imbalances, the avoidance of excessive deficits represents an essential prerequisite for the maintenance of fiscal policies conducive to monetary and overall macroeconomic stability. The need for sound fiscal policies is especially evident in a monetary union if negative spill-over effects from one member state’s budget to the rest of the union are to be avoided.
This is the rationale behind the existence of the excessive deficit procedure – laid down in the Treaty establishing the European Community and further clarified in the Stability and Growth Pact (SGP) – which aims to limit the risks to price stability that might otherwise arise from national fiscal policies.