Fiscal Adjustment in Times of Crisis: The Case of the Euro-Area

Journal Title: International Journal of Financial Markets - Year 2014, Vol 1, Issue 1

Abstract

Countries in the European Monetary Union have been divided into two major blocks according to their ability to respect fiscal criteria and ensure sound public finance. The widespread belief is that this ability influences the interest rate financial markets apply, the sustainability of deficit and debt and the long-run growth. As a consequence, some countries are asked to achieve severe retrenchment to restore confidence. The aim of this paper is to show that the financial stability is realized at expenses of a lower targeted output, rather than representing the premise of a greater growth. When a negative shock occurs the deficit/GDP ratio goes up and sends the signal that governments are loosening their fiscal stance, so that financial markets increase the interest rates applied. Due to aggregate demand effect of the sharp increase in refinancing costs, deficit grows greater and greater causing unsustainability of public finance. Hence national policy authorities, following Emu prescriptions, accept to reduce public expenditure regardless the level of output and employment to be reached. They face the choice either to target a lower output or to devalue the currency, but the uncertainty of cost of exiting from the EMU makes devaluation highly unlikely and causes a passive acceptance of fiscal retrenchments.

Authors and Affiliations

Rosaria Rita Canale

Keywords

Related Articles

Measuring Service Quality using Servqual Model in Pakistan

The study intends to investigate the level of service quality in PCBs using the Servqual model in Pakistan. The Servqual model has been used due to its authenticity for measuring service quality gaps. By using factor a...

Relationship between Indian Stock Market Performance and Macroeconomic Variables: An Empirical Study

Macroeconomic variables have long been hypothesised to significantly affect stock market performance. But no consensus for this relationship exists in case of developing markets. We examine the short and long run dynam...

Bankers Perception of Economic Determinants of Non-Performing Loans in Ghana

The study looks at perception of bankers on economic variables causing Non-Performing Loans (NPLs) in Ghana since 2005. The research was design to use primary data collection from bankers who evaluate loans and approvi...

How Causal Dimensions of Product Harm Crises Shape Firm’s Financial Status: from Sri Lankan’s Moral Reputational Perspective

Causative dimensions of product harm crisis influence how a consumer responds. This research explores through a new empirical angle and makes several unique contributions to the existing marketing literature by explori...

How Do Firms with Financial Constraints Manage Liquidity?

Firms with financial constraints need to maintain cash and cash equivalent at an optimal level. Lack of liquid assets sends a negative signal to the market, leading to a potential collapse of the stock prices. The ineff...

Download PDF file
  • EP ID EP28697
  • DOI -
  • Views 306
  • Downloads 9

How To Cite

Rosaria Rita Canale (2014). Fiscal Adjustment in Times of Crisis: The Case of the Euro-Area. International Journal of Financial Markets, 1(1), -. https://europub.co.uk/articles/-A-28697