Fiscal Retrenchment and Hypothetical EMU

Abstract

This section links a fiscal retrenchment in Italy (examined in the previous section) and hypothetical EMU scenarios (studied in part II). A heuristic approach is chosen: subsection 9.1 discusses generally expected results for fiscal-EMU scenarios, presents specific results for the lax fiscal-CP scenario⁷⁰and pinpoints discrepancies between actual and expected results. In subsection 9.2, these discrepancies are reassessed and interpreted as interdependencies between the fiscal consolidation program in Italy on the one hand, and interest and exchange rate impulses as well as effects caused by the hypothetical EMU on the other hand. It is shown that there is a general pattern applicable to all fiscal-EMU scenarios. Subsection 9.3 pursues the implications of these interdependencies for the interest-exchange trade-off illustrated in section 6. Possible policy recommendations are derived. Subsection 9.4 discusses scope and limitations of the analysis in part III.