Forex Flash: EU crisis is no ordinary predicament – Goldman Sachs

FXstreet.com (Barcelona) - According to the Economics Research Team at Goldman Sachs, “The current EU crisis is not a ‘normal’ slowdown or recession and, therefore, should not be used as a template to assess whether a fiscal union is required to guarantee the long-term stability of EMU. National stabilization policy only second best, but sufficient in
‘normal’ times.” Whether countries are able to deal with a cyclical shock or not depends on their fiscal position, the size of the shock and the fiscal multiplier.

If we assume a balanced budget position and a shock in the form of a 2% recession, EMU countries would have sufficient capacity to use fiscal policy – either via automatic stabilizers or outright discretionary measures – to smooth the cycle. However, “a long transition period will be needed until governments once again reach a fiscal position that provides them with sufficient flexibility to make full use of a national stabilization policy. In dealing with the legacy of the past crisis, it is also possible that significant one-off transfers – in the form of debt-restructuring(s) – will be required for some countries to reach this point.” the team adds.