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Sovereign Bankruptcy in the European Union in the Comparative Perspective

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  • Leszek Balcerowicz

Abstract

This paper distinguishes four alternative sovereign debt resolution mechanisms: pure market solutions, modified market solutions, crisis lending by the IMF and other institutions, and the proposed Sovereign Debt Restructuring Mechanism (SDRM). It is hard to find--at the general level of analysis--the unique advantages of SDRM. The assessment of the European Stabilization Mechanism will ultimately depend on its operation, especially whether it will be a tool of subsidizing countries in debt distress or an instrument of fiscal crisis lending. The present fiscal problems in the eurozone are due to the erosion of fiscal discipline and not to the lack of strong compensatory transfers within the eurozone. The right model to look at the conditions for the stability of the eurozone is not a single state but the gold standard-type system, a system of sovereign states with a (de facto) single currency. Based on this analogy and considering modern developments, three types of measures are needed to safeguard the stability of the eurozone: (1) measures that would reduce the procyclicality of the macroeconomic policies and of the economy; (2) reforms that would help the eurozone economies grow out of increased public debt; and (3) steps to increase the flexibility of the economy so that it can deal with the future shocks in a better way.

Suggested Citation

  • Leszek Balcerowicz, 2010. "Sovereign Bankruptcy in the European Union in the Comparative Perspective," Working Paper Series WP10-18, Peterson Institute for International Economics.
  • Handle: RePEc:iie:wpaper:wp10-18
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    References listed on IDEAS

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    Cited by:

    1. Schilirò, Daniele, 2011. "A new governance for the EMU and the economic policy framework," MPRA Paper 32235, University Library of Munich, Germany, revised Jul 2011.
    2. Marco Committeri & Francesco Spadafora, 2013. "You Never Give Me Your Money? Sovereign Debt Crises, Collective Action Problems, and IMF Lending," IMF Working Papers 13/20, International Monetary Fund.

    More about this item

    Keywords

    Debt Resolution; European Union; Eurozone; Financial Crisis; SDRM;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F00 - International Economics - - General - - - General
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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