Guillaume Schwegler*, Marco Matani**

*We study how non-fundamental surges in perceived sovereign default risk propagate to the real economy when banks hold long-term public debt. In the model, higher default risk raises sovereign spreads, tighten intermediary constraints, and depress investment and output. Because default risk is partly endogenous to debt dynamics, the initial exogenous downturn raises the debt-to-GDP ratio and amplifies sovereign risk, producing a sovereign–bank loop. Estimating the model on Italian data, we find that these shocks quantitatively dominate welfare losses. Fiscal policy determines the strength of amplification: rules that stabilize debt using broad, relatively inelastic tax bases (especially consumption taxation) deliver the largest welfare gains, whereas deficit targeting implemented through capital taxation can be destabilizing and extremely costly.

**Based on a sufficient statistics approach, we show how the state of technology of European industries relative to the rest of the world can be empirically assessed in a way that is simple in terms of computation, parsimonious in terms of data requirements, but still comprehensive in terms of information. The lack of systematic cross-industry correlation between export specialization and technological advantage suggests that standard measures of revealed comparative advantage only imperfectly capture a country’s technological prowess due to the concurrent influences of factor prices, market size, markups, firm selection and market share reallocation. These findings offer policy insights relevant to the EU’s external competitiveness debate, echoing several recommendations from the Draghi report. Achieving export specialization in key sectors requires more than just technological superiority, and this holds even more true for destinations outside the single market.