It has long been thought that a monetary union can only function well if its governance imposes extra fiscal discipline on the member countries of the union. I argue that the arguments for extra fiscal discipline in a monetary union are weak. The current Stability and Growth Pact (SGP) is broken. It has incredible complexity that has been built in over the years when it became clear that fiscal discipline based on the use of numerical targets does not work. As a result, it has lost credibility as a way to organize fiscal discipline. There is an urgent need of reform of the fiscal rules embedded in the SGP.
In this paper I contribute to the debate by developing the principles that should guide this reform of the fiscal rules in the Eurozone. These principles are that the numerical targets should be replaced by sustainability analyses of each member countries’ budget and debt prospects. In addition, I argue that the reforms should prioritize public investments by making it possible for the latter to be financed by issuing debt. Finally, I argue that any fiscal sustainability governance should be integrated with the ECB’s policies regarding its holdings of government bonds. Decisions by the ECB to sell or not to sell these bonds affect the sustainability of public debts of the member countries of the union.