Box 1: Eurozone Fiscal Rules Well-designed and implemented fiscal rules can help eliminate the deficit bias

and support prudent fiscal policies. To be effective, fiscal rules must be flexible to address exceptional circumstances and simple and transparent to be understood by policymakers and the public. But the experience in the Eurozone suggests that effective enforcement and sanctioning mechanisms must also be in place to ensure compliance. Eurozone s national fiscal policies are coordinated by the supranational !tability and "ro#th $act %!"$&, a rules-based frame#ork that entered into force on 'anuary (, ())). The !"$ has t#o nominal anchors* + percent of ",$ for general government deficit and -. percent of ",$ for public debt. /n addition to these t#o nominal anchors, the !"$ re0uires the Eurozone national budget balances to converge to#ards a medium-term ob1ective. This constitutes the preventative arm of the !"$. 2n excessive deficit procedure %E,$& applies #hen either the deficit threshold is breached or the public debt threshold is exceeded and the debt level has not been diminishing to#ards the threshold. /n the event of non-compliance #ith the policies proposed by the European 3ommission, sanctions are implemented. /n practice, the !"$ fell short of promoting fiscal discipline in the Eurozone. Bet#een ())) and 4.((, the (4 initial Eurozone member countries all exceeded the deficit threshold -. percent of the time. 2s a result, the so-called 5six-pack,6 five regulations and one directive, entered into force on ,ecember (+, 4.(( to strengthen the !"$. The six-pack 0uantitatively defines #hat a significant deviation from the medium-term ob1ective or the ad1ustment to#ards it means. /t also operationalizes the debt criterion. /n order to promote enforceability, the six-pack introduces reverse 0ualified ma1ority voting %789:& for most sanctions. The 789: implies that a proposal or recommendation is adopted in the 3ouncil of the European ;nion unless a 0ualified ma1ority %at least 4<< out of a total of +=<& votes against it. The >iscal 3ompact is the fiscal part of the Treaty on !tability, 3oordination, and "overnance %T!3"&. The T!3" is an international agreement and not an E; la#. The fiscal 3ompact, once it enters into force, #ill run in parallel to the six-pack and further strengthen the implementation and enforcement of the existing fiscal rules in the Eurozone. The >iscal 3ompact re0uires the mediumterm ob1ective as #ell as automatic correction rules in case of breach to be #ritten into national la#s. The medium-term ob1ective, as defined in the !"$, is a structural deficit of ..< percent of ",$ %( percent of ",$ if public debt is less than -. percent of ",$&. The >iscal 3ompact is more stringent #ith the deficit criterion* the E,$ #ith 78:9 applies #hen the general government deficit exceeds the threshold of + percent of ",$. The 5t#o-pack,6 a #ork in progress, #ill strengthen the preventative arm of the !"$ by re0uiring the draft budgetary plans and progress in the E,$ to be monitored and assessed by independent institutions.