Obviously, the optimal features of such a system are difficult to pin down but the practice of name-and-shame has in itself raised the underlying issue and  4  BIS Review 73/2006  thus increased awareness of the importance of fiscal discipline. After decades of more or less lax fiscal policies in several countries, this basic achievement should not be forgotten. Contributing to the problems of ensuring fiscal austerity is that the bigger the union, the smaller the relative size of individual countries. This means that free-riding very well might become a problem as it is rational to run deficits, even if your instinct is not to free-ride. Why? Because even though you belong to the small minority that does not worsen the fiscal position, all countries still have a tighter monetary policy that has come about as a result of the majority running lax fiscal policies. The result could be a bad macroeconomic policy mix: larger deficits and a higher interest rate than would otherwise be the case. In my view, this is a greater problem than the often discussed worst-case scenario of one or more countries experiencing a full-blown debt crisis as a result of a sustained lax fiscal policy. Acknowledging these practical difficulties, the recent re-haul of the SGP can serve as a starting point when deciding upon an appropriate framework that can hopefully minimise the problems touched upon here. Developing a fiscal framework The SGP could be characterized as consisting of three parts: governance, a preventive arm and a corrective arm.
Obviously, a non-negligible part of the future environment for central banks hinges upon these developments. As time goes by, they will provide us with guidance as to which of the two corner solutions for exchange rate policy will prove the most popular – a freely floating currency or membership of a monetary union. However, although important, these developments are admittedly slow and differences in the end-result should not be exaggerated. I merely intend to suggest that the transition in stabilisation policy that comes with joining a monetary union perhaps is not as large as it first seems. Central banking has a long history and although it has been confronted with many changes in the past, it has far from lost its importance, if anything rather the contrary. Basic functions,  7  For a recent study of business cycle synchronisation, see Kose, Otrok and Whiteman (2005). BIS Review 73/2006  7  such as aiding financial intermediation through large value payment systems and acting as a lender of last resort, will remain important in the future as well. Needless to say, it will be very interesting to follow the transformation of EAC in general and the role of the Bank of Uganda in particular. References Annett, A., (2006), “Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe’s Fiscal Framework”, IMF Working Paper, No 06/116. Baldwin, R., (2006), “In or Out: Does it Matter?