Budgetary discipline in EMU was supposed to be exacted not only by the stability and growth pact, but also by market discipline. 8  BIS central bankers’ speeches  Markets were expected to restrain profligate governments by charging them higher interest rates and, thus, forcing them to change their ways.
As is evident from the chart, market discipline was largely absent during the first ten years of EMU, allowing governments to pursue unsustainable policies. And when markets finally started to differentiate between governments, they did so with a vengeance. Although market discipline is now imposing necessary corrections, a stable monetary union cannot be based on this mechanism.