Economic stability is desirable because it encourages economic growth that brings prosperity and employment, and is one of the main objectives enshrined in the management of Economic and Monetary Union and the euro.
Under Economic and Monetary Union (EMU), EU Member States closely coordinate their economic policies with the overall objective of maintaining economic stability. At the same time, the European Central Bank (ECB) conducts an independent monetary policy with the objective of maintaining low inflation in the euro area (below but close to 2%). Economic stability and low inflation create the necessary conditions for sustainable long-term growth, which benefits the euro-area Member States and their citizens.
Sound and sustainable public finances
Under Economic and Monetary Union, Member States must keep their government and debt deficits under specified limits (3% and 60% of GDP, respectively), according to the Treaty and the rules set out in the Stability and Growth Pact. These limits are also one of the convergence criteria a country must meet before it qualifies to adopt the euro. The aim is to ensure sound and sustainable public finances in the Member States of the EU and the euro area.
Sound public finance means that Member States live within their means and do not build up excessive debts that will burden future generations of taxpayers. In theory, governments could borrow heavily to invest and boost economic growth today. However, this is a short-term measure as debt repayments would harm economic growth in the future.
The commitment to sound and sustainable public finances is a commitment to ensuring economic growth and employment over the longer term. It also helps ensure that both today's and tomorrow's citizens are provided for fairly – for example, through adequate healthcare provision and pensions.
Better government budgeting
As with consumers and companies, governments and their electorates – their citizens – also benefit greatly from economic stability. Low inflation in a strong, well-managed euro area makes government borrowing less expensive. This means that interest repayments on national debt, which can be substantial, are reduced. This releases large amounts of taxpayers’ money, previously used to repay the interest, for other purposes depending on national priorities; for example, for tax cuts, new public infrastructure, or welfare systems. In addition, economic stability allows governments to plan national finances, expenditure and revenues with more certainty.
More resistance to external shocks
Economic stability also makes the euro area more resilient to so-called external economic 'shocks', i.e. sudden economic changes that may arise outside the euro area and disrupt national economies, such as worldwide oil price rises or turbulence on global currency markets. The size and strength of the euro area make it better able to absorb such external shocks without job losses and lower growth.
Economic stability benefits society, in particular social cohesion and the less well-off. Volatile changes in inflation and interest rates increase the gap between the richer and poorer groups and regions, as those with more wealth have more opportunities to protect themselves. With stable inflation and interest rates, the less well-off are better protected against the erosion of their wealth, their savings and their purchasing power.