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More of a Contagious Disease

Nov 23, 2010 • Financial Markets, International Trade and Finance, Money and Monetary Policy • 168 Views    No Comments

From FT.com: “The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish finance minister said last week that Spain is not Portugal. There are no prizes for guessing what Italy is not.”

Also, This BBC article does a good job of showing how the fiscal woes of the Irish, Greeks, Portuguese and Spanish differ. Finally, you might want to refer back to “A Contagious Disease” for a diagnosis of eurozone fiscal illnesses.

The Economic Lesson

I discovered an easy to understand academic paper on the connection between fiscal and monetary policy in the “euro area.” Called “The Euro and Fiscal Policy,” it explained the fundamental tension between the “euro area’s” centralized monetary policy and decentralized fiscal policy. Its basic point was that when fiscal policy becomes powerless, monetary policy becomes even more important for steering a nation toward economic health. However, if the economic needs of euro area nations are so different, then how can one monetary policy function appropriately for everyone?

Most simply defined, fiscal policy refers to government spending, taxing, and borrowing while monetary policy applies to the supply of money and credit.

 

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