Strict market discipline is currently weighing on public finances in euro-zone countries

The euro zone is currently characterised by: A lack of capital mobility between the member countries; A very high level of inve stor risk aversion. This means that an increase in a euro-zone country’s fiscal deficit leads to a sharp reaction by this country’s long- term interest rates, since this deficit cannot be financed by savings from other euro-zone countries and since investors react very drastically to increasing risk (in this case sovereign risk ). The m arket discipline weighing on euro-zone countries’ fiscal policies is therefore very severe, to the point that - as shown by the example of Italy - the negative effect of the rise in interest rates on demand can outweigh the positive effect of fiscal expansion.