Report
What would it take for euro-zone countries to freely choose their fiscal policies?
Italy’s situation leads us to ask this question: what would it take for euro-zone countries to freely choose their fiscal policies without interference from the European authorities? The following conditions would have to be met: There would have to be market discipline, i.e. an over-expansionary fiscal policy would lead to a sharp rise in interest rates, which would prompt the country to reduce the fiscal deficit; this seems to be the case for Italy; And there could not be any negative externality of an expansionary fiscal policy conducted in one country on the other euro-zone countries. However, the case of Italy shows that there is a negative externality: a rise in interest rates on one euro-zone country ’s public debt leads to a rise in yields on bank bonds and to a decline in bank share prices, and these upward and downward movements spread to banks in the other euro-zone countries. The presence of this negative externality, even if there is market discipline, prevents euro-zone countries from freely choosing their fiscal policies.
Provider
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.
Patrick Artus
Other Reports from Natixis
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.