Why Government Borrowing Has Become Such A Problem?
- Before the Recession, many countries had a large structural deficit. There was an inability to meet responsible fiscal targets. e.g. political pressure against tax increases and spending cuts. In particular, Greece has been hampered by powerful unions which gained large public sector wage increases without corresponding increases in productivity. Greece has also struggled to raise taxes and check government spending (especially on defence and civil service)
- The depth of the recession has worsened the government fiscal position much more quickly than expected. Tax receipts have fallen, spending on unemployment benefits have increased.
- Euro Inflexibility.Size of current account deficit show decline in competitiveness and unbalanced nature of Euro.
Being a member of the Euro, countries face limitations in Monetary policy.
- Can't devalue to restore Competitiveness. Greece, Portugal and Spain have very large current account deficits - indicative of their uncompetitiveness.
- Can't pursue a moderate inflation target through quantitative easing, independent monetary policy. The problem for the likes of Greece and Spain is that they are trying to impose 'austerity' problems against a backdrop of potential deflation. It is this deflation (or at least very low inflation which makes market more suspicious of European debt levels. It is one thing to have high levels of debt, but, this is compounded by the very weak prospect of economic growth.
- The ECB still pursues a false goal of worrying about inflation.
- Greek debt is financed by short term bonds. This means the debt needs refinancing more quickly and it is then harder to inflate the debt away. - short term investors would require a much higher interest rate to compensate for inflation. With long term debt it is somewhat easier to reduce debt burden through inflation.
- Greece can't leave Euro, even though everyone now agrees it was a mistake to let them in. (even when they joined their debt was over 100% of GDP)
- Problems With Greece Economy
- Drastic Measures for Greek Economy
- Causes of Debt Crisis
- Problems with Italian economy
- Problems of Euro
EU debt as a % of GDP
- Italy - 116%
- EU average - 78.2%
- Portugal - 77%
- Spain - 54%
- UK - 68%
- Greece - 112%
- Ireland - 65%
- Ireland - 14.3%
- Greece - 13.6%
- UK - 11.5%
- Spain - 11.2%
- Portugal - 9.4%
- EU - 6.8%
- Italy - 5.3%