Sixth, financial conditions have become increasingly accommodative, as monetary easing has passed through to a broad range of financial asset prices. Credit spreads have narrowed and the U.S. equity market has risen sharply (Exhibit 7). The price and availability of some types of consumer loans, notably auto loans, has also improved. So why isn’t the U.S. economy growing more quickly? The fact that fiscal policy has turned significantly more restrictive is the most important reason. The impulse from state and local governments that subtracted from growth earlier in the recovery has gone from negative to close to neutral. But this has been overwhelmed by the sharp shift in federal fiscal policy from mild restraint in 2012 to much greater restraint in 2013 (Exhibit 8). The increase in payroll tax rates, the rise in high income tax rates, the increase in taxes associated with the Affordable Care Act, and now the sequester – if sustained – will result in fiscal drag of about 1 3/4 percentage points of GDP in 2013.2 I view this as an unfortunate outcome. While the U.S. must put its public finances on a sustainable footing, this should be done in a manner that best achieves both our near-term and long-term objectives. In my opinion, a U.S. fiscal policy well-suited for the current set of circumstances would start with a very mild degree of restraint in the near-term that would credibly build to substantial consolidation over the next several decades.
At the same time, there is a need for increasing the awareness of the basic principles underlying the surveillance and enforcement process. Ultimately, this requires striking a delicate balance between the sovereignty of national governments, the responsibility of the ECOFIN Council for enforcing the Pact and the independence of the Commission, the latter being essential for an effective assessment of national budgetary positions. The ECB has always considered the fiscal rules enshrined in the Treaty and the Stability and Growth Pact as an essential element of Monetary Union. These rules already contain significant scope for flexibility. While the implementation of the preventive arm of the Pact could no doubt be strengthened, in particular to enhance incentives for compliance in good times, we reject proposals that would undermine the Pact’s corrective arm and the excessive deficit procedure contained in the Treaty. If all policy areas concerned respect the aforementioned allocation of objectives and responsibilities and act accordingly, they will already be making the best possible contribution to the Community objectives. 3. A sound institutional arrangement  A clear allocation of responsibilities is essential for well-designed policy-making, especially in a complex institutional set-up as the one governing monetary union in Europe. At the same time, a continuous dialogue between different policy actors on the basis of the allocation of tasks is also important for effective governance.