Government solvency and financial markets: Dynamic panel estimates for the European Monetary Union

We assess government solvency in the European Monetary Union (EMU), controlling for the interaction of fiscal policy with financial markets. We find a positive interaction, reflecting market-based pressures for fiscal improvement, and significant debt stabilization efforts, weakened in the post-EMU era.

► We assess government solvency in EMU, controlling for fiscal policy and financial markets interaction. ► We find market-based pressure for fiscal improvement in EMU over the period 1988-2009. ► Debt stabilization efforts are weakened in the post-EMU era. ► Prudent fiscal behavior stems from the less indebted countries in EMU. ► High debt countries seem to undertake lower scale discretionary measures to mitigate increased borrowing costs.