"We point out that official forecasts of output dynamics are crucial to the assessment of cyclically adjusted budget balances, and provide evidence that in some euro-area countries biased forecasts have played a thus far neglected role in generating excessive deficits. We suggest that the forecast bias may be politically motivated, and that forecasts produced by an independent authority would be better than in-house Ministry of Finance forecasts for the purpose of monitoring budget formation and budget outcomes." Copyright CEPR, CES, MSH, 2006.

started this paper in 2006 when he was a visiting scholar at DGECFIN in Brussels. The original research was funded by DGECFIN from a grant to him in 2006-2007. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

In September 1931, Sweden became the first country to make the stabilization of the domestic price level the official goal of its monetary policy, actually the only country that so far has adopted such an explicit price level target. Starting from the issues and concepts familiar from research and policy experience of inflation targeting -as contrasted to price level targeting -this paper examines the evolution of the Swedish price level targeting in the 1930s. We bring out a number of similarities and differences between price stabilization in the 1930s and in the 1990s.

The creation of EMU and the ECB has triggered a discussion of the future of EMU. Independent observers have pointed to a number of shortcomings or "hazard areas" in the construction of EMU, such as the absence of a central lender of last resort function for EMU, the lack of a central authority supervising the financial systems of EMU, unclear and inconsistent policy guidelines for the ECB, the absence of central co-ordination of fiscal policies within EMU, unduly strict criteria for domestic debt and deficits, as set out in the Maastricht rules, in the face of asymmetric shocks, and Euroland as not an "optimal" currency area.Do these "flaws" represent major threats to the future of EMU? Or will they be successfully resolved by the European policy authorities, leading to a lasting and prosperous EMU?We provide answers to these questions by examining the historical record of monetary unions. We try to extract the key conditions for establishing and for maintaining monetary unions intact. Our main lesson from the history of monetary unions is that political factors will be the central determinants of the future of EMU. The "economic" shortcomings of EMU will likely be overcome as long as political unity prevails within EMU.