The Short-Run Boundaries for Implementation of Fiscal Policy in the Euro Zone : Lessons from the Current Recession and Policy Suggestions

This study analyzes the short run issues of fiscal policy implementation in the Euro Area and the effectiveness of debt expansion in member economies. The research indicates that both developing economies and those with high levels of accumulated debt face trouble with the expansion and management of their deficits. These differences indicate why the Stability and Growth Pact is not efficient to provide budgetary cooperation between the Euro Zone economies. The theoretical and econometric analysis in this work indicates a strong -- and unequal -- causal relation between the debt level and risk premium over debt obligations issued in the primary market since the launch of the euro. These results indicate that establishing a primary common area bond market can help to relieve troubled economies, such as Greece, from their structural budgetary problem. Nevertheless, resistance to higher interest on debt amongst the leading economies in the group would make the implementation of such a market a difficult task