The Diversity of Debt Crises in Europe

Jerome L. Stein

Brown University - Division of Applied Mathematics; CESifo (Center for Economic Studies and Ifo Institute)

February 16, 2011

CESifo Working Paper Series No. 3348

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?

Number of Pages in PDF File: 21

Keywords: European debt crisis, excess debt, early warning signals, domestic housing sector, government deficit debt

JEL Classification: F020

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Date posted: February 20, 2011  

Suggested Citation

Stein, Jerome L., The Diversity of Debt Crises in Europe (February 16, 2011). CESifo Working Paper Series No. 3348. Available at SSRN: https://ssrn.com/abstract=1762578

Contact Information

Jerome L. Stein (Contact Author)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679

Brown University - Division of Applied Mathematics ( email )
Providence, RI 02912
United States
401-863-2143 (Phone)
401-863-1355 (Fax)
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