By Dimitrios D. Thomakos, Platon Monokroussos, Konstantinos I. Nikolopoulos
This publication presents a radical review of the hot monetary problem from the viewpoint of either practitioners and teachers specialising within the area.
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Extra resources for A Financial Crisis Manual: Reflections and the Road Ahead
This exacerbated the dislocation and added fuel to the fire as markets now took the lead from economic fundamentals in determining developments in a self-fulfilling matter. Policy makers, therefore, had a twin objective. First, arrest and reverse the visible deterioration of economic fundamentals. Second, and equally importantly, never allow again the self-fulfilling market dynamics to interfere negatively with their first objective. Investment opportunities were determined along these lines as well.
For Italy, the EC highlighted that the “limited adjustment towards the medium-term objective (MTO) is justified by the severe economic conditions and the efforts needed to implement an ambitious programme of structural reforms”. Hence, it called for strict implementation of announced reforms but also for “additional measures for the deficit trajectory to be in line with the SGP”. 7% required. Despite this, the non-compliance with the debt reduction rule and the absence of an independent budgetary committee, the EC chose not to reopen an EDP for Italy.
However, targeting nominal deficits leads to pro-cyclical effects: new austerity measures lead to lower growth and wider deficits and so on. After a number of self-defeating rounds of fiscal consolidation in the periphery in the first stages of the crisis, the EC surprised in 2013 by taking a very pragmatic view of fiscal adjustment: countries delivering the required structural efforts will benefit from the necessary extension for the nominal target to be coherent with the macro scenario. The wording on Spain was particularly telling: “Spain has implemented a structural effort in 2012 and 2013 which, taking into account the unexpected adverse economic developments compared to when the Council recommendation was issued, is in line with the revised EDP recommendation.