However, it suffered from weak national implementation and a lack of enforcement at the European level. Enforcement of the SGP was built on a peer pressure mechanism among Member States. In the past, however, Member States proved to be reluctant to enforce adequate fiscal discipline on their peers. Moreover, decision-making bodies at the EU level were left with a  10  See A. van Riet (ed., 2010), “Euro area fiscal policies and the crisis”, ECB Occasional Paper, no. 109, April (http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp109.pdf). 6  BIS central bankers’ speeches  significant degree of discretion regarding the implementation of the fiscal rules, notably following the 2005 reform.11 Incentives for ensuring sound national fiscal positions have as a consequence been insufficient. Member States failed to adhere to their medium-term budgetary objectives and only slowly corrected excessive deficits. As a result, a number of euro area countries accumulated large fiscal imbalances already in “good times”, instead of using opportunities for reducing public deficits and debt levels. Therefore, they were left with hardly any room for manoeuvre when the financial and economic crisis hit. In the wake of the crisis, the substantial underlying fiscal and structural weaknesses in a number of euro area countries, as well as the inability of the current governance framework to prevent the emergence of such imbalances, became very apparent.
BIS central bankers’ speeches  7  making, which should have much stronger powers, and would also mean stricter constraints on national budget policies. This kind of reforms would require a comprehensive change to the EU Treaty but, above all, an adequate mechanism to ensure their democratic legitimacy. Let me outline the ideal cornerstones of such a governance reform. First, to ensure fiscal discipline, all planned deficits of more than 3% of GDP and those in excess of a country’s medium term objective would need to be approved by all euro area governments. Second, past fiscal slippages would be automatically corrected in upcoming budgets without any room for discretion via the introduction of constitutional rules similar to the German “debt brake”. Third, all Member States would also agree to implement fines and sanctions in a quasi-automatic mode. Finally, with the introduction in 2013 of a permanent crisis resolution mechanisms, the European Stability Mechanism (ESM), those countries slipping in the progress with their macroeconomic adjustment programmes would temporarily loose financial autonomy. The institutional arrangements at both national and supranational level would also have to be strengthened. At the national level, independent budget offices would ensure reliable forecasts – a prerequisite for sound planning and implementation of budgets. At the euro area level this needs to be complemented by an independent entity with a clear mandate and a strong institutional framework to assess the implementation of fiscal rules.