The 1996 Annual Economic Report of the European Commission stated that (in reference to the French economy): fiscal consolidation is a necessary condition for a stable macroeconomic environment...

to the French economy): fiscal consolidation is a necessary condition for a stable macroeconomic environment conducive to growth and employment. It should enable an easing of monetary policy, compatible with the monetary stability objective, which should offset the adverse effect on economic activity of budgetary restraint. (p. 24)

Explain each step of this argument by answering the following questions:

(a) What is a stable macroeconomic environment?

(b) What is meant by fiscal consolidation?

(c) Why is (b) necessary for (a)?

(d) Through what mechanisms would (a) be conducive to growth and employment?

(e) Revise your understanding of the terms ‘an easing of monetary policy’ and ‘monetary stability’ (see Chapter 13).

(f) What evidence would you wish to consult in order to be satisfied that an easing of monetary policy would succeed in offsetting the adverse effect of budgetary restraint?