Countries with high public debt badly need a credible set of fiscal rules within a monetary union.
This is what the euro-zone’s fiscal contract with its members is supposed to achieve. It acts as a commitment device forcing governments to gradually reduce their debt burden. The credibility of this commitment is what makes the high-debt countries less vulnerable to shocks that change market pricing of sovereign risk.
Unfortunately, this contract is not working. Under the pressure of the refugee crisis, the terrorist attacks and the revival of populism, the E.U.’s Stability and Growth Pact is limping and hardly enforceable. Its numerous exemptions make it no longer credible, and the increasing divergence in public debt-to-GDP ratios across countries certifies that the contract is simply not working.