The European Crisis Deepens
AbstractSuccessive plans to restore confidence in the euro area have failed. A combination of misdiagnosis, lack of political will, and dysfunctional politics across 17 nations have all contributed to the failure so far to stem Europe's growing crisis. Proposals currently on the table also seem likely to fail. Boone and Johnson say the euro area faces two major problems: First, the introduction of sovereign credit risk has made nations and subsequently banks effectively insolvent unless they receive large-scale bailouts. Second, the ensuing credit crunch has exacerbated difficulties in the real economy, causing Europe's periphery to plunge into recession, thus increasing the financing needs of troubled nations well into the future. Five measures are needed to enable the euro area to survive: (1) an immediate program to deal with excessive sovereign debt, (2) far more aggressive plans to reduce budget deficits and make peripheral nations "hypercompetitive" in the near future, (3) supportive monetary policy from the European Central Bank, (4) the introduction of mechanisms that credibly achieve long-term fiscal sustainability, and (5) institutional change that reduces the scope for excessive leverage and consequent instability in the financial sector.
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Bibliographic InfoPaper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB12-4.
Date of creation: Jan 2012
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-08 (All new papers)
- NEP-EEC-2012-03-08 (European Economics)
- NEP-MAC-2012-03-08 (Macroeconomics)
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