The main objective of the single monetary policy is to maintain price stability, while supporting the EU general economic policies. The monetary policy management must be processed in accordance with the principles of an open market economy, with free competition.

Within fiscal policy, the euro area countries must manage public finances so as to guarantee a sustainable growth, as envisaged in the EU Treaty.

Moreover, with a view to ensuring lasting fiscal convergence of the countries participating in the EMU, a Stability and Growth Pact was adopted, through which all Member States acknowledge the need of a sound fiscal policy to the smooth functioning of the EMU.

Adopted at the Amsterdam European Council in June 1997, the Pact is built on two key aspects: a preventive, early-warning system for identifying and correcting budgetary slippages before they bring the deficit above the 3% of GDP ceiling set by the EU Treaty, and a dissuasive set of rules, to put pressure on Member States to avoid excessive deficits and to take measures to correct them quickly if they occur.

Member States participating in the euro area also committed themselves to pursuing a national medium-term budgetary target close to balance or in surplus.

The Pact comprises three legally binding elements:

1- A resolution of the European Council, laying down the firm commitments of the Member States, the Commission and the Council to implement the Stability and Growth Pact. Member States have undertaken to aim in the medium term for budget balances which are close to balance or in surplus.

2- A Council regulation on the strengthening of the surveillance of budgetary positions and the surveillance and co-ordination of economic policies: participating Member States will submit stability programmes setting out national medium-term budgetary objectives and other relevant information. The key feature of these programmes will be the specification of national medium-term budgetary targets set close to balance or in surplus. This will allow countries to pursue anti-cyclical fiscal policies without breaching the 3% reference value of the deficit.

As part of the co-ordination of economic policies, Member States not participating in the euro area will submit convergence programmes, similar in content to stability programmes, but will cover a broader range of variables, inter alia, monetary policy objectives particularly with regard to exchange rates and inflation.

These plans will also reflect the fact that some Member States may not yet fulfil some of the convergence criteria. The Council will regularly examine both the stability and the convergence programmes. Should significant slippage from targets be identified, the Council can issue a recommendation to the Member State concerned. Such recommendations constitute an early-warning mechanism.

3- The last element of the Stability and Growth Pact is a Council regulation on speeding up and clarifying the implementation of the excessive deficit procedure. According to this regulation, if there are no exceptional circumstances and the deficit is considered excessive, the Council will immediately issue a recommendation to the Member State concerned. A maximum of four months is then allowed for the country to take effective action to correct the situation. If the Council considers that the measures are not effective, the next step of the procedure will be engaged.

Ultimately, sanctions can be imposed, where appropriate, within ten months of the reporting of figures notifying the existence of an excessive deficit. The sanctions include the obligation of the Member State concerned to make a non-interest bearing deposit, possibly supplemented by the non-pecuniary sanctions foreseen by the Treaty. The deposit shall, as a rule, be converted to a fine if the excessive deficit is not corrected within two years. There is an upper limit of 0.5% of GDP for the annual amount of deposits.

The exceptional circumstances which may avoid this procedure can be an event such as a natural disaster or a severe economic downturn that push a deficit beyond 3% of GDP. An annual fall of real GDP of at least 2% is regarded as an undoubtedly exceptional economic downturn. When the annual fall in real GDP is between 0,75% and 2%, the Council may judge on the evidence of arguments presented by the Member State concerned that the downturn is nevertheless exceptional.