Financial and Fiscal Interaction in the Euro Area Crisis: This Time Was Different

39 Pages Posted: 3 Jul 2018

See all articles by Alberto Caruso

Alberto Caruso

Confindustria, Centro Studi; Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Lucrezia Reichlin

London Business School; Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); European Central Bank (ECB)

Giovanni Ricco

University of Warwick - Department of Economics; SciencesPo - OFCE

Date Written: June 2018

Abstract

This paper highlights the anomalous characteristics of the Euro Area `twin crises' by contrasting the aggregate macroeconomic dynamics in the period 2009-2013 with the business cycle fluctuations of the previous decades. We report three stylised facts. First, the contraction in output was marked by an anomalous downfall in investment, while consumption, savings and unemployment followed their historical relation with GDP. Second, households' and financial corporations' debts, and house prices deviated from their pre-crisis trends. Third, the jump in the public deficit-GDP ratio in 2008-2009 was unprecedented and so was the fiscal consolidation that followed. Our analysis points to the financial nature of the crisis as a likely explanation for these facts. Importantly, the `anomaly' in public deficit is in large part explained by extraordinary measures in support of the financial sector, which show up in the stock-flow adjustments and reveal a key interaction between the fiscal and the financial sectors.

Keywords: Euro Area, Government Debt, Recessions

JEL Classification: C11, C32, C54, E52, E62, F45

Suggested Citation

Caruso, Alberto and Reichlin, Lucrezia and Ricco, Giovanni, Financial and Fiscal Interaction in the Euro Area Crisis: This Time Was Different (June 2018). CEPR Discussion Paper No. DP13016, Available at SSRN: https://ssrn.com/abstract=3206781

Alberto Caruso (Contact Author)

Confindustria, Centro Studi ( email )

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Italy

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Lucrezia Reichlin

London Business School ( email )

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London, London NW1 4SA
United Kingdom

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

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Brussels, B-1050
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+32 2 650 4221 (Phone)
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Centre for Economic Policy Research (CEPR)

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United Kingdom

European Central Bank (ECB) ( email )

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Germany

Giovanni Ricco

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://www.giovanni-ricco.com/

SciencesPo - OFCE ( email )

69 Quai d'Orsay
Paris 75004
France

HOME PAGE: http://www.giovanni-ricco.com/

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