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The Interaction of Political, Fiscal and Financial Stability: Lessons from the Crisis

Editor

Listed:
  • Ernest Gnan

Author

Listed:
  • Ernest Gnan
  • Ewald Nowotny
  • András Simor
  • Iain Begg
  • Andrew Bosomworth
  • Ugo Panizza
  • Elga Bartsch
  • Moritz Kraemer

Abstract

The current financial, economic and fiscal crisis is among other things characterised by complex interrelations between financial, fiscal, macroeconomic and political instability. One instability breeds another, with feedback loops generating self-reinforcing adverse cycles: The financial crisis triggered the ‘Great Recession’. Countermeasures by governments – to save banks and bolster up aggregate demand – ultimately jeopardized fiscal sustainability and bred the fiscal crisis. The latter in turn destabilised sovereign bond markets and banking systems in several countries. Political instability resulted from the substantial fiscal consolidations forced upon governments in the light of threatening or actual loss of access to financial market financing, and the accompanying deep recessions and sharp increase in unemployment. Political instability in turn further erodes economic and financial market confidence, thus worsening short and long-term economic and fiscal prospects, and further aggravating financial instability. In the EU and more specifically the Euro Area, multiple channels of spillovers and contagion turn the problems from purely national phenomena to ones of EU-wide and ultimately even global scope. Thus, apart from national political processes, Euro Area and EU-wide economic governance has been criticized for not addressing reform needs decisively, thus prolonging and deepening the cycle of instability.

Suggested Citation

  • Ernest Gnan & Ewald Nowotny & András Simor & Iain Begg & Andrew Bosomworth & Ugo Panizza & Elga Bartsch & Moritz Kraemer, 2013. "The Interaction of Political, Fiscal and Financial Stability: Lessons from the Crisis," SUERF Studies, SUERF - The European Money and Finance Forum, number 2013/1 edited by Ernest Gnan, May.
  • Handle: RePEc:erf:erfstu:73
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    References listed on IDEAS

    as
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    3. Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Filippo Presbitero, 2012. "External imbalances and financial fragility in the euro area," Mo.Fi.R. Working Papers 66, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    4. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    5. William Easterly & Timothy Irwin & Luis Servén, 2008. "Walking up the Down Escalator: Public Investment and Fiscal Stability," The World Bank Research Observer, World Bank, vol. 23(1), pages 37-56, January.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Trenovski, Borce & Tashevska, Biljana, 2016. "Fiscal Sustainability of Macedonia on its path towards the EU," MPRA Paper 76321, University Library of Munich, Germany, revised 2016.
    2. Taki Fiti & Biljana Tashevska, 2013. "The European Debt Crisis And Its Implications On The Macedonian Economy," Journal Articles, Center For Economic Analyses, pages 25-42, June.

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    More about this item

    Keywords

    Financial stability; sovereign bonds; political stability; Euro Area; contagion; spillovers; crisis management; monetary policy; liquidity; fiscal consolidation; supervision; governance; banking union; sovereign ratings;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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