Report
Patrick Artus

Can euro-zone countries avoid market discipline?

Some euro-zone countries (France, Italy) currently do not comply with European budgetary rule s , due to increases in government transfer payments to households and tax cuts, and the Italian government refuses to lower its deficit, which, given the flat tax, the universal income and the sluggish growth could reach at least 3 . 5% of GDP in 2020. Is it possible that euro-zone governments are refus ing to apply European budgetary rules? The problem for a large country is not threats of an excessive deficit procedure, which it can reject; the problem is market discipline. The rise in long-term interest rates in the event of an excessive fiscal deficit forces the country to correct its fiscal policy, but we have seen that market discipline appeared in the case of Italy (and this will certainly happen again) , but not in the case of France. Why are not all countries subject to market discipline? The equilibrium is self-fulfilling: as long as fiscal solvency is expected, interest rates are low, market discipline does not appear and fiscal solvency is actually ensured (case of France); if expectations are that fiscal solvency will not be ensured, then interest rates rise and it is actually is no longer ensured; Investors may think that the reforms conducted in France will increase potential growth, while it will remain very low in Italy.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Patrick Artus

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