This is exactly the case with the European Union; a European-Union-Member-State that fails to pay on its public arrears will cause weakening of capital amidst its financers. The danger that this financial catastrophe will extend towards the remaining Euro-Area would position the ECB under immense stress to help and rescue the dissolute Member-State, despite the fact that this move may undermine Euro-Area value in the progression (Eichengreen and Wyplosz, 1998). As long as private agents consider that ECB would give way to this stress and as long as Member States keep the right to act in a dissolute way, the central bank will eventually require reliability. Once more, most of this reasoning is also relevant to numerous supply-side procedures; for instance, the viewpoint of inflationary earnings settlements. Salaries negotiating that drive the curve externally will, perhaps, produce pressures for the central bank to assist the ensuing inflation to keep away...
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