Limited Liability Non-Bank Government Debt for the Euro Zone

Abstract:     
The European sovereign debt crisis has triggered debate between self-styled ‘fiscal federalists’ – urging loans and transfers amongst Euro area member states to support adjustment of unsustainable deficits – and ‘fiscal hawks’ – proposing stronger and more rigorously enforced central rules on debts and deficits. This paper argues that it will be much better to accept stronger market disciplines on fiscal policy, avoiding an unnecessary loss of national sovereignty that could ultimately lead to the break up the single currency. Concrete proposals are made, including a form of limited liability ensuring that unsustainable government debt is restructured in an orderly and predictable manner.

Number of Pages in PDF File: 40

Keywords: optimal currency areas, fiscal policy, sovereign debt, European monetary union, Maastricht treaty, fiscal crises, subsidiarity, market discipline

JEL Classification: E42, E62, H6, H87

working papers series