To make things worse, if confidence in fiscal sustainability is eroded, an adverse feedback loop among fiscal balance, the financial system and the real economy may exert a negative impact on economic activity, as shown in the sovereign debt problem in the European peripheral countries. IV.
More generally, by lowering interest rates, fiscal consolidation should diminish net capital inflows into the United States, thereby reducing the current account deficit in this country and current account surpluses elsewhere. The resulting pattern of international debt accumulation and capital flows would be more balanced than at present, promoting a more sustainable pattern of growth in the global economy.