The problems are tackled by strengthening Eurostat and allowing it to make methodological visits in the member states, to discuss budget issues. A new high level group with a mandate to advise Eurostat will be established. As Eurostat monitors the member states’ compliance with the agreed practice, the high level group also, indirectly, advises the member states. My view is that all the reforms in this area of the Stability and Growth Pact go in the right direction since they encourage fiscal prudence. However, given the complicated process and the short time since the Pact was changed, it is too early to determine whether the changes have been a complete success. Changes in the preventive arm Changes in the preventive arm have been made in the area of medium term objectives (MTO) for the budget balance. Member states are divided into groups depending on their debt level. Stricter MTOs are required for countries with higher debt. The MTOs for the euro area and the ERM2 countries range from a deficit of 1% of GDP to balance or surplus depending on the debt level. The countries that have not achieved their MTOs are supposed to follow an adjustment path to the objectives. The path requires more consolidation in good times. For the euro area and ERM2 states, the adjustment requirement is a yearly improvement of the cyclically adjusted deficit net of one off effects by 0.5% of GDP.
This is precisely why it is the job of the authorities to “take away the punchbowl as the party gets going”. I just cannot see how we could calibrate ex ante rules for the increase in capital requirements or whatever that would be needed to do that, but we would of course need somehow to find a way of sensibly constraining the discretion at the core of the alternative approach. Even if we could resolve all those issues, a fifth big issue is how far individual national authorities would be able to operate in this field on their own, given free flows of capital internationally and cross-border banking. These big questions are, of course, inter-related. Most obviously, how far we could get in designing an instrument(s) and a process for its deployment will affect whether the objective should be to ameliorate the effects of economic shocks on the banks or also the effects of the credit-creation process on the economy. And the objective will have a bearing on whether it is host or home authorities who need to constrain a bank’s lending growth. That is a formidable agenda, and it underlines just how much there is to do. Macroprudential: markets and infrastructure as part of the transmission mechanism But if we are to deliver and maintain stability, a macroprudential agenda cannot focus only on countercyclical capital (or margin) requirements. We need to focus on how large shocks might be transmitted through the financial system. Again, there is an analogy with monetary policy.