The paper contributes to the debate on the reform of EU economic governance and proposes a new framework centred on a 'sustainability pact'. This pact would be the outcome of a negotiation between high-debt countries and the European Commission and should be approved by the EU Council. The authors also argue for the introduction of a common budgetary instrument, ready to be activated upon the occurrence of events specified ex ante or for the implementation of joint projects of an exceptional nature.
The pact would include a medium-term debt target and a multi-year deficit profile consistent with that target. The deficit profile would be binding unless deviations are due to macroeconomic surprises or events beyond the control of governments. For high-debt countries that do not sign a pact, the current 1/20th debt rule would apply.