Article 126 [Prohibition of Excessive Government Deficits]

The authors of the Maastricht Treaty regarded sound public finances of the MS as the key element of a well-functioning Economic and Monetary Union (EMU) marked by price stability. This stance could already be found in the Delors Report (1989) written in preparation for the introduction of a single currency. This means that an MS should not incur unsustainable public debts, for this could endanger the maintenance of price stability, which is the “primary objective” (Article 105.1 TEC-Maastricht, now Article 127.1 TFEU) of the ESCB. Under this logic, the nexus between sound public finances and price stability is as follows: an MS having joined the common currency has lost the competence to pursue a monetary policy tailored to its specific needs. Above all else, such an MS can no longer devaluate its currency, a useful tool to reduce sovereign debt provided that government bonds are not issued in a foreign currency. Against this background, an MS having piled up more and more debts may exert political pressure on the ECB to conduct an inflationary monetary policy running counter to price stability. Furthermore, unsustainable public debts may also have negative spillover effects on other MS.