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The rising public debt in the EU: Implications for Policy

Journal of Contemporary European Studies, Vol. 19, No. 1, March 2011, Special Issue: Crisis Management in Europe, 2011

The current financial and economic crisis is of unprecedented proportions and intensity. Given the piecemeal approach of the EU institutions to economic policy, their reaction to the mounting crisis has been slow and hesitant. The much feared financial meltdown in the E.U. has been avoided. However this came at the cost of increasing pressure on public finances in most member states, leading to a public debt crisis in a number of them. Financial liberalization and the lagging financial policy reform exacerbated such pressure, bringing certain member states such as Greece to the verge of default. Even more importantly, the stability of the eurozone appears to be in danger. This has led to an avalanche of new measures, including the newly instituted “European Stabilization Mechanism”, as well as proposals for the adjustment of fiscal policy co-ordination, under the general heading of “reinforcing economic governance in Europe” . Financial policy reform, on the other hand, is lagging. A new supervisory framework is being put into place, while reaction from the finance industry is delaying the reform of the regulatory framework. So, what next? Past experience confirms that a financial crisis is usually followed by a sovereign debt crisis. Is this what is happening in the EU? With what social and economic implications? Further, what are the implications of rising sovereign debt for economic policy? These are some of the questions we discuss in the present article. In particular, we examine (i) the concept of the sovereign debt and its relevance to the EU and to the eurozone; (ii) the historical experience of crises; (iii) the response of the EU to the current crisis and (iv) the prospects for policy.

Managing the Euro Area Debt Crisis (review)

In the aftermath of the subprime crisis, the increasing amount of public debt cumulated by some of the weaker Eurozone countries began to pose a huge threat to the stability of the whole European Monetary Union. Because of the global recession and poor public finance management, from 2009 to 2012, the debt-to-GDP ratios and interest rates of Portugal, Spain, Ireland, Greece and Italy increased so sharply that, undermining the confidence of market-investors, these countries seemed to be threatened by an imminent risk of default (Lane, 2012). In this context, many began to question not only their public debt sustainability, that is their ability to repay their debt in the future (Haltom et al., 2012), but, above all, the best and more efficient paths towards their recovery and restructuration. In “Managing the Euro Area Debt Crisis” (2014), William R. Cline, senior economist at the Peterson Institute for International Economics, provides us with a challenging analysis on the public debt sustainability of Italy, Spain, Greece, Portugal and Ireland. By taking advantage of his expertise on debt issues as well as drawing on his previous works on public debt solvency (2011; 2012), Cline builds an original probabilistic model to assess the sustainability these countries. On this basis, in clear contrast with those being more critic to excessive austerity in the Eurozone (De Grauwe and Ji, 2013) and from a more liberal perspective, Cline argues that fiscal consolidation has been and will be fundamental for all these countries. Advocating more political integration within the EMU, his work sets undoubtedly a strong theoretical basis not only for the redefinition of a more efficient economic governance in the EMU, but also for addressing crucial political questions undermining the stability of the whole EU.

1The Sustainability of Public Debt in Europe

2014

The issue of budget discipline has always been crucial for European Monetary Union as it concerns both the functioning of EMU in stage 3 and th qualification to access it (Bin-Smaghi, Padoa-Schioppa, Papadia 1994). Yet, the purpose of the fiscal criteria is not uncontentious. The stumbling-bloc is not so much the objective of avoiding “excessive deficits”, but rather the need for binding rules contained in the Treaty on European Union (TEU). Recently, the issue of strictly interpreting the fiscal criteria for the selection of EMU-members in 1999 has also gained prominence. An overly restrictive interpretation could put the whole project at risk, while a lax application could threaten the long-t rm sustainability of the new currency. Proponents of the fiscal criteria argue that countries have typical structural characteristics and that each country must therefore have produced evidence before joining EMU that it is capable of maintaining financial discipline. Issing (1996) went so fa...

Sovereign Debt Crisis of the Eurozone Countries

Oeconomia Copernicana, 2016

The aim of the publication is to examine the fiscal position of the euro area countries and fiscal policy architecture in Europe after the outbreak of the financial and economic crisis started in 2008. The first part of the publication consists of the analyses of the budgetary situation of euro area countries and complications with the increasing costs of servicing the public debt in the European market affected by the financial liquidity crisis. In the second section the most important changes in the framework of budgetary policies coordination process in the euro zone are presented. The final section describes the role and activities of the European Central Bank in minimising the negative consequences of the debt crisis in the euro zone.

Europe, public debts, and safe assets: the scope for a European Debt Agency

Economia Politica, 2021

The Covid-19 crisis has radically changed the game for world and EU-economies, and urged for a reappraisal of the guidelines for a healthy management of public expenditure. This requires a deep rethinking of the role of public debt in modern capitalistic economies and of efficient, equitable and politically viable ways of financing it. This paper outlines the main operating framework of a Debt Agency tasked with the management of the Eurozone sovereign debts and the creation of a truly European safe asset. The framework leverages on the potential irredeemable nature of sovereign debts in order to build a common bond. By structurally filtering liquidity risk, the Debt Agency can price the Member States’ funding costs by referring only to their credit risk, as defined by EU agreed rules. The common bond issued by the Debt Agency thus avoids mutualisation by design; hence, it can be directly bought by the ECB. Due to its structural intertemporal sustainability, the Debt Agency’s framew...

SYMPOSIUM ON THE PUBLIC FINANCE AFTER THE CRISIS: EUROPE

This symposium aims at encouraging the academic discussion surrounding public finance after the fiscal crisis in Europe under the particular consideration of Eurozone-specific eco- nomic, political, social as well as institutional aspects. The articles in this symposium blend the negative and positive approach to fiscal policy coordination in Europe. The papers exam- ine the economic responses in a set of EU countries during major consolidation periods fol- lowing the recent Financial Crisis, and evaluate if fiscal rules that focus on debt constraint are feasible under various economic scenarios.

The Sustainability of Public Debt in Europe

2009

The issue of budget discipline has always been crucial for European Monetary Union as it concerns both the functioning of EMU in stage 3 and the qualification to access it (Bini-Smaghi, Padoa-Schioppa, Papadia 1994). Yet, the purpose of the fiscal criteria is not uncontentious. The stumbling-bloc is not so much the objective of avoiding “excessive deficits”, but rather the need for binding rules contained in the Treaty on European Union (TEU). Recently, the issue of strictly interpreting the fiscal criteria for the selection of EMU-members in 1999 has also gained prominence. An overly restrictive interpretation could put the whole project at risk, while a lax application could threaten the long-term sustainability of the new currency.

European Debt Crisis and Fiscal Exit Strategies

The 2007-2009 financial crisis was caused by financial markets' greed and instability. The crisis led public debts and deficits to rise substantially in developed countries. Financial markets and international institutions claim for a "fiscal exit strategy" through rapid reductions in public deficits and substantial falls in public debts owing to large public spending cuts (especially social expenditure). The article shows that the state of public finances was generally satisfactory before the crisis; the rise in deficits was needed for macroeconomic stabilisation purposes and does not signal higher future interest rates or inflation. 'Crisis exit strategies' should keep interest rates at low levels and government deficits, as long as they are necessary to support activity; they should question financial globalisation and macroeconomic strategies in neo-mercantilist and in liberal countries. The crisis should not be an opportunity for leading classes and Europe...