France and Italy: Fiscal deficit, supply constraints and low capital mobility: What consequences?

The French and Italian governments have chosen to implement an expansionary fiscal policy in 2019 in order to boost household income. We are also seeing signs that international capital mobility has become low in these countries: non-residents are pulling out, the holding of financial assets is becoming more domestic. Lastly, France and Italy are suffering from insufficient supply of goods and services, due to hiring difficulties, cost competitiveness disadvantage s and insufficient production capacity. We therefore seek to identify the consequences of an expansionary fiscal policy when international capital mobility is low and there are supply constraints. An expansionary fiscal policy then normally leads to: Low variation in real exchange rates (therefore, in a currency area, in relative prices between the member countries) and low variation in foreign trade (since capital flows are small ); A small increase in production (it is , admittedly, not weakened by the external deficit , but its rise is limited by supply constraints); A significant rise in interest rates (since the fiscal deficit cannot be financed by capital inflows from the rest of the world and because demand must be reduce d because of supply constraints). The fiscal policy conducted in France and Italy will therefore probably have little impact on inflation , external trade and production, and it is likely to lead to a noticeable rise in interest rates that may threaten fiscal solvency and dampen private sector demand.