The Pact has been constructed with a view to generating so much pressure on Member States to put government finances in order that sanctions will never be necessary. A knotty problem when constructing the Pact was how to make the requirements sufficiently strict without placing undue restrictions on national fiscal policies. This is all the more important when monetary policy is no longer available at national level, so that the task of adjustment falls more heavily in practice on fiscal policy. OECD estimates indicate that in a “normal” economic downturn, the cyclical budget balance in EU countries weakens by 1-1.5 per cent of GDP. Some budgetary discretion is therefore needed so that there is a margin for automatic stabilisers to act when activity is falling. The conclusion is that the trade-off seems reasonable but the Pact does make it necessary to achieve a balanced budget or a surplus relatively soon. Under these circumstances, the Swedish government’s ambition to establish an annual budget surplus of 2 per cent over the business cycle is commendable. Fiscal policy accordingly faces new challenges and it is not all that easy to tell just what may happen. When monetary policy ceases to be a national instrument, fiscal policy will have to play a greater part in stabilisation policy.
Looking at our experience over the last decade, there is a good case for bringing financial stability higher in our priorities. That may imply, in particular, that, when assessing the economic and financial environment, central banks should take a longer term perspective and be more alert to incipient financial imbalances. •  I would note, in passing, that the Eurosystem is well equipped to take such a perspective. Our "two pillar "approach allows us to look permanently at the dynamics of money and credit aggregates, which are essential to detect both long term risks to price stability and potential threats to financial stability. •  But more should be done. It is now broadly accepted that a "macro prudential" approach should be taken when implementing financial supervision. That means looking both at system wide implications of our prudential decisions and their impact on financial imbalances and the real economy. •  Central banks have a major role to play in this process for four reasons: (1) they have an incentive to act, since well functioning financial markets are essential for the transmission of monetary policy; (2) being equipped to permanently look both at financial markets and economic cycles they may have an informational advantage in analyzing their interaction; (3) there independence allows them to produce dispassionate and candid assessments of risks; (4)and, finally, their proximity to the banking system provides them with an intimate knowledge of financial dynamics.