However, this crisis is a crisis of confidence. While, under normal circumstances, consolidation might dampen the economy, the lack of trust in public finances and in policymakers” willingness to act is a huge burden for growth. Thus, frontloaded, and therefore credible, consolidation would instead strengthen confidence, actually help the economy to grow and reduce the danger of the crisis spreading to the financial system.
In addition, urgently needed structural reforms and consolidation are often hard to disentangle. For example, a bloated public sector or very generous pension system are both a drag on growth and a burden on the budget. The same applies to inefficient companies that are state-owned or operate in highly regulated sectors.