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Preserving EMU Depends on Success of ESM in Solving the Debt Crisis


  • Janusz Sawicki


The paper presents a systemic explanation of the ongoing debt crisis in the European Monetary Union (EMU). The way monetary policy has been conducted in the eurozone as well as ineffective management of both public and private debt created a systemic risk that in 2010 turned into a full-fledged debt crisis. The author’s analysis of past EMU data, official internal and external forecasts and the way that debt negotiations have proceeded yield a number of conclusions. One of these is that the European Stability Mechanism (ESM) and the European Central Bank (ECB) are in a position to stabilize the debt situation for some time if they are flexible in their approach. However, this requires extensive cooperation between peripheral and central countries as well as within these groups. This condition is necessary but not sufficient to stabilize the EMU, the author says. As most of the EMU countries are heavily indebted (a situation that applies to both the public and private sectors), a new system of financial regulations must be hammered out, along with instruments to allow the peripheral countries to grow out of their debt problems. That will not happen without a partial debt reduction and external assistance, the author says, as the heavily indebted economies will not be able to adjust, because of economic as well as political factors. As in all past debt negotiations, conditionality, comparability of treatment and moral hazard problems will play a role, the author concludes.

Suggested Citation

  • Janusz Sawicki, 2012. "Preserving EMU Depends on Success of ESM in Solving the Debt Crisis," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 10, pages 1-22.
  • Handle: RePEc:sgh:gosnar:y:2012:i:10:p:1-22

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    References listed on IDEAS

    1. Nigel A Chalk & Richard Hemming, 2000. "Assessing Fiscal Sustainability in Theory and Practice," IMF Working Papers 00/81, International Monetary Fund.
    2. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    4. Robert J. Shiller, 2012. "Finance and the Good Society," Economics Books, Princeton University Press, edition 1, number 9652.
    5. Jorg Bibow, 2012. "The Euro Debt Crisis and Germany's Euro Trilemma," Economics Working Paper Archive wp_721, Levy Economics Institute.
    6. Martin Feldstein, 1991. "Introduction to "The Risk of Economic Crisis"," NBER Chapters, in: The Risk of Economic Crisis, pages 1-18, National Bureau of Economic Research, Inc.
    7. Martin Feldstein, 1991. "Reducing the Risk of Economic Crisis," NBER Working Papers 3620, National Bureau of Economic Research, Inc.
    8. Alberto Bagnai, 2010. "CEEC vs. PIGS: a comparative panel assessment of financial sustainability and twin deficits," Working Papers LuissLab 1088, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    9. Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
    10. Martin Feldstein, 1991. "The Risk of Economic Crisis," NBER Books, National Bureau of Economic Research, Inc, number feld91-2, Juni.
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    More about this item


    debt; debt management; financial sustainability; EMU; ESM;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt


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