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The Diversity of Debt Crises in Europe

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  • Jerome L. Stein

Abstract

The foreign debts of the European countries are at the core of the current crises. Generally, the crises are attributed to government budget deficits in excess of the values stated in the Stability and Growth Pact (SGP)/Maastricht treaty. Proposals for reform generally involve increasing the powers of the European Union to monitor fiscal policies of the national governments and increasing bank regulation. My article is concerned with the following issues. [Q1] How can one explain the inter country differences in the debt crisis in Europe? Is there a single explanation, cause? [Q2] Specifically, were the crises due to government budget deficits or to the private sector? The answer will determine what is the appropriate policy to prevent a recurrence. [Q3] The Stability and Growth Pact/Maastricht Treaty and the European Union focused upon rules concerning government debt ratios and deficit ratios. They ignored the problem of “excessive” debt ratios in the private sector that led to a crisis in the financial markets. Neither the markets nor the Central Banks anticipated the crises until it was too late. My basic questions are: What is an “excessive” private sector debt ratio that is likely to lead to a crisis? What are theoretically based, not empirical ad hoc, Early Warning Signals (EWS) of debt crises? The answers determine to a large extent how one should evaluate proposals for economic reform, to avert future crises?

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Article provided by Cato Journal, Cato Institute in its journal Cato Journal.

Volume (Year): 31 (2011)
Issue (Month): 2 (Spring/Summer)
Pages: 199-215

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Handle: RePEc:cto:journl:v:31:y:2011:i:2:p:199-215

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  1. Stein, Jerome L., 2006. "Stochastic Optimal Control, International Finance, and Debt Crises," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199280575, October.
  2. Stein, Jerome L., 2011. "The crisis, Fed, Quants and stochastic optimal control," Economic Modelling, Elsevier, Elsevier, vol. 28(1), pages 272-280.
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Cited by:
  1. Karlhans Sauernheimer, 2011. "Greece: Bail-out Packages, Current Account and Foreign Debt," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 12(4), pages 37-43, December.
  2. Beirne, John & Fratzscher, Marcel, 2012. "The Pricing of Sovereign Risk and Contagion during the European Sovereign Debt Crisis," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9249, C.E.P.R. Discussion Papers.
  3. Stefan Mittnik & Willi Semmler, 2013. "The Real Consequences of Financial Stress," SFB 649 Discussion Papers SFB649DP2013-011, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  4. Schrader, Klaus & Laaser, Claus-Friedrich, 2012. "Die Krise in Südeuropa oder die Angst vor dem Dominoeffekt: Griechenland, Portugal und Spanien im Krisentest," Kiel Discussion Papers 500/501, Kiel Institute for the World Economy (IfW).
  5. Larry D. Wall, 2012. "Central banking for financial stability Some lessons from the recent instability in the US and euro area," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, Policy Research Institute, Ministry of Finance Japan, vol. 8(3), pages 247-280, August.
  6. Wall, Larry D., 2012. "Central Banking for Financial Stability: Some Lessons from the Recent Instability in the United States and Euro Area," ADBI Working Papers, Asian Development Bank Institute 379, Asian Development Bank Institute.
  7. Proaño, Christian R. & Schoder, Christian & Semmler, Willi, 2014. "Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions," Journal of International Money and Finance, Elsevier, Elsevier, vol. 45(C), pages 17-37.

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