Abstract
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.
Highlights
If markets do not believe in the efficacy of the European Stability Mechanism (ESM), the indebted economies will be not allowed to re-enter the financial markets at reasonable costs in the future
That should preserve the German position in determining conditions of refinancing banks and governments. All this makes the debt trap we observe in the European Monetary Union (EMU) not so easy to escape from even if we assume that the rescue process is extended in time
The growing debt/GDP ratio and persistent budget deficits presented in the official financial planning in all heavily indebted countries indicate that closing budgetary gaps will depend on deep structural changes
Summary
Summary: The paper presents a systemic explanation of the ongoing debt crisis in the European Monetary Union (EMU). 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. This requires extensive cooperation between peripheral and central countries as well as within these groups.
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