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The essence of the problem is an adverse feedback loop among fiscal conditions, the financial system, and the real economy.
Second, as I explained earlier by taking the example of the sovereign debt problem in Europe, if confidence in the government's debt repayment ability is undermined, there would be an adverse feedback loop among fiscal conditions, the financial system, and the real economy.
Such an adverse feedback loop among fiscal conditions, the financial system, and the real economy is the inherent nature of the sovereign debt problem.
It should be recognized that the problem entails the risk that the adverse feedback loop among the fiscal situation, the financial system, and economic activity will intensify further.
In turn, the lending attitude of financial institutions to firms and households deteriorated, and this negative sentiment among economic entities had a detrimental effect on economic activity, giving rise to an adverse feedback loop among the fiscal situation, the financial system, and economic activity.
As such, in Europe a feedback loop among fiscal balances, the financial system, and the real economy is now operating in an undesirable way: that is, a decline in confidence in public finances has caused a high degree of concern over stability in the financial system, and this has adversely affected economic activity, including sentiment.
Nevertheless, an adverse feedback loop among the fiscal balance, the financial system, and economic activity continues to operate in Europe, particularly peripheral countries, and the effects have recently started to spill over to core countries as well.
Moreover, as seen in the sovereign debt problems in European peripheral countries since last year, once confidence in fiscal sustainability erodes, this will result in an adverse feedback loop among fiscal conditions, the financial system, and the real economy, with negative consequences for economic activity.
To make things worse, if confidence in fiscal sustainability is eroded, an adverse feedback loop among fiscal balance, the financial system and the real economy may exert a negative impact on economic activity, as shown in the sovereign debt problem in the European peripheral countries.
As such, Europe currently faces a difficult situation as a result of the adverse feedback loop among the fiscal situation, the financial system, and economic activity.
In European countries facing serious fiscal situations, an adverse feedback loop among fiscal conditions, the financial system, and the real economy has materialized.
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