Eva Srejber: Greater budgetary discipline in the EU through transparency and national ownership Speech by Ms Eva Srejber, First Deputy Governor of the Sveriges Riksbank, at a breakfast seminar organised by Ernst & Young, Stockholm, 26 September 2006. *  *  *  Fiscal and monetary policy are interdependent. A government needs transparent and consistent monetary policy to know how to conduct fiscal policy. Similarly, no monetary policy will be sustainable if there is a rapid accumulation of debt. This is what Sweden witnessed in the 1980s and the early 1990s. An unsustainable mix of fixed exchange rates and lax fiscal policy, which led to high inflation and eventually to a crisis that landed us with an even higher mountain of debt. When the regime collapsed, General Council decided that the Riksbank should work towards a direct inflation target. The Riksbank determined that the target would be two per cent. Today this policy is hailed as a success. However, the real breakthrough for the new regime was in the mid-1990s when a forceful implementation of fiscal consolidation, supported by a broad political majority in parliament, made the macroeconomic set-up as a whole credible. It was only then that inflation expectations among the public finally fell to the target of 2 per cent, and interest rate spreads against Germany were reduced substantially. This fiscal tightening could in turn be based on the predictability of the new monetary regime with a clear inflation target. And the tighter fiscal policy would eventually allow less restrictive monetary policy.
This is a strengthening compared to the earlier agreement among the euro area countries, changing the requirement from targeting the cyclically adjusted deficit to targeting an improvement in the structural deficit. When deciding the adjustment path, public investment and structural reforms can be taken into account. If structural reforms are to be taken into account, they should have a large and proven positive effect on the economy and there should be a safety margin to the 3% deficit floor. My view is that there is a possibility to use the newly defined MTOs in a wise manner, more closely adapted to the situation of the individual country. However, the scope for interpretation is so large that there is a high risk of lax and uneven implementation. The experiences of the first year indicate that some member states have more ambitious MTOs than required by the Pact. This is often countries with their own national budgetary rules, such as Sweden, which comprise MTOs. At the same time,  2  BIS Review 88/2006  there are other member states who need to do more to achieve their MTOs. The measures are often postponed too far ahead and are not sufficiently explicit and concrete. Changes in the corrective arm The third part of the changes refers to what happens when a country has an excessive deficit. As before, exemptions can be granted if the country is suffering from a severe economic downturn that it could not foresee, so called exceptional circumstances.