The Euro Area's Tightrope Walk: Debt and Competitiveness in Italy and Spain
1) Competitiveness adjustment in struggling southern euro-area members requires persistently lower inflation than in major trading partners, but low inflation worsens public debt sustainability. When average euro-area inflation undershoots the two percent target, the conflict between intra-euro relative price adjustment and debt sustainability is more severe. 2) In our baseline scenario, the projected public debt ratio reduction in Italy and Spain is too slow and does not meet the European fiscal rule. Debt projections are very sensitive to underlying assumptions and even small negative deviations from GDP growth, inflation and budget surplus assumptions can easily result in a runaway debt trajectory. 3) The case for a greater than five percent of GDP primary budget surplus is very weak. Beyond vitally important structural reforms, the top priority is to ensure that euro-area inflation does not undershoot the two percent target, which requires national policy actions and more accommodative monetary policy. The latter would weaken the euro exchange rate, thereby facilitating further intra-euro adjustment. More effective policies are needed to foster growth. But if all else fails, the European Central Bank’s Outright Monetary Transactions could reduce borrowing costs.
|Date of creation:||Oct 2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +36 1 482-5155
Fax: +36 1 482-5029
Web page: http://web.uni-corvinus.hu/matkg/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reinhart, Carmen M. & Rogoff, Kenneth, 2011.
"A Decade of Debt,"
CEPR Discussion Papers
8310, C.E.P.R. Discussion Papers.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "A Decade of Debt," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.), Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 4, pages 97-135 Central Bank of Chile.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "A Decade of Debt," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6222.
- Jean Pisani-Ferry & Silvia Merler, 2012. "The simple macroeconomics of North and South in EMU," Working Papers 740, Bruegel.
When requesting a correction, please mention this item's handle: RePEc:mkg:wpaper:1307. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Balazs Varga)
If references are entirely missing, you can add them using this form.