Lorenzo Bini Smaghi, European Central Bank executive board member, has offered another reason why fiscal retrenchment need not spell recession. This has obviously become an important theme for the ECB, with the US increasing the pressure for European policy steps that promote growth.

Speaking in Brussels, Mr Bini Smaghi pointed out the role of financial markets is often overlooked when future scenarios are modelled. “An unsustainable fiscal policy will, sooner or later, receive the attention of financial markets; they tend to react abruptly, generating a crisis which impacts heavily on the economy.”

He went on: “A timely fiscal adjustment which puts debt dynamics back onto a sustainable path entails a stronger growth over time. Read more