This edition of the Quarterly Report examines a number of facets of the euro area adjustment challenge. In its Focus section, it analyses external sustainability in euro-area countries, some of which have accumulated large net external liabilities. The macroeconomic consequences of large net liabilities include debt service payments acting as drag on national income, slower growth and a greater likelihood of macroeconomic shocks. In the euro area, a number of Member States are in a process of external rebalancing by ways of reducing their current account deficits. As a result, their foreign indebtedness is moving into safer territory. In other Member States, however, further adjustment is still needed, requiring changes in their economic structure that can be supported by appropriate structural reforms.

Other chapters of the Quarterly Report look at various issues surrounding fiscal consolidation. One contribution investigates the prominent question whether consolidation can be 'self-defeating' in that it may fail to reduce government debt as a share of GDP. While debt ratios may initially increase in some Member States in response to fiscal consolidation, the Report finds that the effect is in most cases short-lived. Truly self-defeating consolidation is not impossible but would require very unlikely circumstances. Consolidation thus remains necessary to reduce debt in the medium-term.

A second topic looks into the interaction between fiscal consolidation and labour market rigidities. It shows that labour market regulation does not reduce the harmful short-term effects of consolidation on employment, but can raise the risk of a rise in long term and therefore structural unemployment. A final chapter analyses the potential impact of a securities transaction tax, concluding that – in addition to generating additional tax revenue – it may also dampen financial sector volatility. Introduction of the tax also brings some efficiency gain as the amount of resources devoted to speculative financial transactions in the economy declines. However, there may be adverse side-effects on financing costs for productive capital and output in the long run.