Debt Crisis and Fiscal Fragmentation of Euro-Zone

Abstract

Based on panoramic view of the EMU fiscal fragmentation, it is shown that the divergence of the euro area could not be caused by inadequate principles of the Monetary Union. Prior to common currency transition the problem of fiscal fragmentation was disguised in a more stable global environment and confidence for the future policy of the ECB. The debt crisis in the EMU brought the problem of fragmentation out of the latent state, showing a clear division between the countries that have kept on competitiveness and whose economic growth has positive expectations, and the rest ones, which are characterized by the fact that their financial imbalances have been combined with the loss of competitiveness. Speculation against structural inflexibility tightened fiscal fragmentation. Fiscal rather than monetary reasons for the EMU divergence lie in a combination of in- centives to reduce distortion of national debt reduction in the environment of global liquidity expansion and the institutional weakness of fiscal rules model of Stability and Growth Pact. Fiscal fragmentation has the signs of saving for a long time, threatening to enhance sensitivity of the EMU macro-financial stability to the economy policies of individual countries. Fiscal fragmentation of the euro area is incompatible with the prospects of common currency as a reserve one.