6. What Went Wrong with Public Debt and Macroeconomic Stabilization?

The fiscal developments in the past 12 years underscore the need for institutional rules to discipline fiscal policies. Markets provided abundant funding even for countries like Greece or Portugal that had evident fiscal sustainability problems. Also, many years of deficits above 3 % in Italy did not scare the markets. As argued above, an explanation for the complacency of markets may have been the scepticism that the no-bailout clause of the Maastricht treaty would actually be applied in times of crisis. With the setup of big rescue funds in May 2010 this view was actually confirmed. But the situation and the market perception completely changed with the approaching Greek default that hit private investors, as described in Chap. 3. Of course, this came far too late to have any pre-emptive effect on policy decisions.