Fiscal credibility in financial markets or a lack thereof is all but irreversible

Despite the continuous rise in its public debt ratio, France enjoys a very stable yield spread against Germany, even when there is bad news about the French economy. Despite the improvement in the Spanish and Portug uese economies and the improvement in Italy’s public finances, these countries’ yield spreads against Germany widen sharply whenever the ECB does not act to tighten them. This shows that fiscal credibility in financial markets or a lack thereof is all but irreversible. The core euro-zone countries continue to be perceived as core countries and the peripheral countries as peripheral countries. This makes ECB intervention vital as soon as economic or political tensions appear.