What should be done with fiscal deficits if growth becomes very weak in the euro zone?

- "It is possible that growth may become very weak in the euro zone in the
second half of 2010 and in 2011:
· if growth slows down in the United States, which may be feared based on recent figures;
· as a result of the drastic reduction in the fiscal deficit decided on in the United Kingdom;
· due to the decline in real wages and the rise in the household savings rate;
· due to the sharp reduction in fiscal deficits in those euro-zone countries which have no choice because they are under pressure from financial markets (Greece, Portugal, Ireland, Spain);
· as a consequence of offshoring, deindustrialisation and the low level of corporate investment."
- "The question that then arises concerns the attitude that should be adopted regarding their fiscal deficits by those countries that have no major obligation to reduce their deficits immediately: Germany, France, Italy, Netherlands, Belgium, Austria and Finland."
- "If euro-zone growth were to become very weak, it would of course be reasonable for them to put off a reduction in their fiscal deficits, but:
· will they want to do so (attitude of Germany)?
· will they be able to do so (possible negative investor reaction to a failure to reduce deficits)?"
Natixis Flash Economics 363 20100715

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