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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?
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jerome L. Stein, 2011. "The Diversity of Debt Crises in Europe," Cato Journal, Cato Journal, Cato Institute, vol. 31(2), pages 199-215, Spring/Su.
  • Handle: RePEc:cto:journl:v:31:y:2011:i:2:p:199-215
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    References listed on IDEAS

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    1. Stein, Jerome L., 2006. "Stochastic Optimal Control, International Finance, and Debt Crises," OUP Catalogue, Oxford University Press, number 9780199280575.
    2. Stein, Jerome L., 2011. "The crisis, Fed, Quants and stochastic optimal control," Economic Modelling, Elsevier, vol. 28(1-2), pages 272-280, January.
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    Cited by:

    1. Mittnik, Stefan & Semmler, Willi, 2013. "The real consequences of financial stress," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1479-1499.
    2. Beirne, John & Fratzscher, Marcel, 2013. "The pricing of sovereign risk and contagion during the European sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 60-82.
    3. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2017. "Analysis of the seeds of the debt crisis in Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 23(15), pages 1589-1610, December.
    4. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2015. "Survival Maximizing Leverage of an Economy: The Case of Greece," Working Paper series 15-17, Rimini Centre for Economic Analysis.
    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, vol. 8(3), pages 247-280, August.
    6. 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).
    7. Karlhans Sauernheimer, 2011. "Greece: Bail-out Packages, Current Account and Foreign Debt," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 12(4), pages 37-43, December.
    8. Willi Semmler & André Semmler & Christian Schoder, 2013. "Makroökonomische Effekte der Haushaltskonsolidierung in der Europäischen Union," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 82(4), pages 163-180.
    9. Mirdala, Rajmund & Ruščáková, Anna, 2015. "On Origins and Implications of the Sovereign Debt Crisis in the Euro Area," MPRA Paper 68859, University Library of Munich, Germany.
    10. 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, vol. 45(C), pages 17-37.
    11. Begoña Álvarez García & Lucía Boedo Vilabella & Dolores Lagoa Varela, 2012. "A new theoretical analysis of the debt financing decision. European evidence from industry data," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 2, pages 1-1, December.
    12. 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 379, Asian Development Bank Institute.
    13. Haluk Yener & Thanasis Stengos & M. Ege Yazgan, 2014. "Analysis of The Seeds of Debt Crisis in Europe," Working Paper series 24_14, Rimini Centre for Economic Analysis.
    14. Draper Thomas, 2013. "An Analysis of the European Debt Crisis: Its Etiology, Current Status, and Possible Future Direction," CRIS - Bulletin of the Centre for Research and Interdisciplinary Study, De Gruyter Open, vol. 2013(1), pages 61-76, January.

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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