Within the euro area, less and less money circulated between banks in different countries. Doubts about the future of the euro area in its current form encouraged a speculative movement which lead to further increases in sovereign spreads. All the governments of the weaker countries responded with fiscal consolidation policies, initially hesitant, then more vigorous.
But economic activity continued to weaken and spreads continued to grow. It was a situation which has brought into focus the nature of the “ideal” fiscal consolidation – one which reduces the deficit and the debt with the least negative consequences for a country’s GDP. The prevailing evidence indicates that it should be concentrated on reductions in current spending and not on tax increases.