But if inefficiencies are high and the economy adjusts more slowly, fiscal policies need to be more expansionary, and for longer, and this can in turn generate spillovers on other participating economies and on the single monetary policy. To give an example of this interaction, Ireland and Spain were two countries that experienced relatively similar shocks emanating from the financial and construction sectors.
Both saw their primary deficits deteriorate by around 13pp of GDP between 2007 and 2009. However, by 2012 Ireland had reduced that deficit by more than 7pp of GDP, whereas in Spain the primary deficit was less than 2pp lower. This certainly reflected stronger consolidation efforts in Ireland as part of its adjustment programme.