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Similarly, while fiscal deficits have decreased, they are still well above the desired targets.
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Public debt remains above desirable levels.
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Increases in public deficits and stocks of debt come from persistently high levels of public expenditure and/or from assumptions of debt from the financial sector.
5. Policy Issues This section presents an interpretation of the policy issues that generated the current situation. As pointed out in the previous sections, a rosy picture prevailed for the first (nine) years of the Euro currency, not only in the Euro zone but also in the European Union as a whole. That is, until the bubbles burst, credit came to a sudden stop and the economies stalled and found themselves with extremely high levels of deficits and debt and had lost competitiveness. While things went well, several drawbacks or risks of the monetary union—which are now evident today—were not apparent. Some of the most important are the following. 5.1 Implications of the Fixed Exchange Rate The fixed exchange rate nature of the common currency under the Euro and the absence of fast factor mobility within the EU and within the Euro zone, represent important differences of the necessary adjustment when compared to cases where the exchange rate can move, or to other monetary unions like the United States or other federations. Capital flows were substantial, but mainly cross-border transactions of claims and liabilities, 20 while equity has not been as mobile. Migration takes place, yes, but only over time. In a monetary union, when real shocks are absent or insignificant there is no need of rapid relative price adjustments. The low speed of factor mobility is not a problem. Contrastingly, when significant reductions in real expenditure flows, the real stock of debt (and wealth) and real wages are called for, the impossibility of a nominal devaluation makes the adjustment very difficult to achieve, and it likely implies much political discomfort and leads to high levels of unemployment. The reality is that, nominal public expenditure is very difficult to reduce because of all kinds of commitments and earmarks, and it is hard to decrease internal debt 20
See Lane (2011) and Gourinchas, Rey and Truempler (2011).
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