The absence of capital mobility between euro-zone countries and the Italian government’s fiscal policy

Capital mobility between the euro-zone countries has been absent since the 2010-2013 euro-zone crisis. L ike for the other peripheral countries , the upshot for Italy is that it can no longer attract non-resident capital to finance its deficits, which means that : It cannot have an external deficit; The fiscal deficit must be financed by d omestic (Italian) investors (savers). In these conditions, an increase in the Italian fiscal deficit: Can not cause an external deficit to open up again, as it would not be financeable ; Must be financed solely from Italian domestic savings, which makes interest rates much more sensitive to the fiscal deficit than in the situation where savings from the euro zone as a whole could be used . The absence of capital mobility between the euro-zone countries is therefore a strong incentive for strict fiscal discipline in Italy.