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Symposium 2010

Fighting Sovereign Debt Crises Worldwide

The Challenge

In dealing with the past financial crisis, have we sown the seeds for a national debt crisis? The massive increase in public debt that has resulted from the crisis is of particular concern. This rise of public debt has made it more difficult to use expansionary fiscal policies to fight the next crisis.

Public debt is rising particularly fast in countries with ageing populations, threatening public confidence in the sustainability of their social security systems. It is conceivable that high public debt and a resulting downgrading of public bonds could in itself trigger a new crisis. Unless economic growth re-emerges faster than consensus projections, rising sovereign debts will likely present a serious problem in many countries.

What are the appropriate fiscal exit strategies from the recent global economic crisis? What are the consequences of these crises on the global economic development? Is there a global strategy and what are its national impacts? How should the burden of fiscal consolidation be shared across social groups? How can governments strike the right balance between macroeconomic management and debt sustainability? How can government ensure that their debt burden does not rise faster than national product over the business cycle? Should the governments’ implicit assets and liabilities be counted along with the explicit ones in assessing the national debt burden? What fiscal strategies could ensure that governments are able to provide adequate fiscal stimulus in times of recession, while maintaining long-term fiscal rectitude?

    Solutions

    Solution
    Symposium 2010

    Each member state of the European Union should be required to formulate a credible fiscal consolidation strategy. Each member state should set a fiscal rule and appoint an independent fiscal ...

    Each member state of the European Union should be required to formulate a credible fiscal consolidation strategy. Each member state should set a fiscal rule and appoint an independent fiscal authority ...

    Each member state of the European Union should be required to formulate a credible fiscal consolidation strategy. Each member state should set a fiscal rule and appoint an independent fiscal authority to implement the rule by specifying the government’s permissible deficit or surplus appropriate for each stage of the business cycle.

    Polity
    Solution
    Symposium 2010

    Governments’ fiscal strategy should take account of macroeconomic imbalances, such as housing bubbles.

    Governments’ fiscal strategy should take account of macroeconomic imbalances, such as housing bubbles.

    Governments’ fiscal strategy should take account of macroeconomic imbalances, such as housing bubbles.

    Polity
    Solution
    Symposium 2010

    To increase credibility, successful budget consolidation should be complemented by institutional reforms.

    To increase credibility, successful budget consolidation should be complemented by institutional reforms.

    To increase credibility, successful budget consolidation should be complemented by institutional reforms.

    Polity

    Proposals

    Proposal
    Symposium 2010

    Fighting Sovereign Debt Crisis Worldwide

    Exit from current expansionary macroeconomic policies should give priority to fiscal consolidation. Fiscal restriction should be combined with prolonged monetary easing to keep aggregate demand on a p ...

    Exit from current expansionary macroeconomic policies should give priority to fiscal consolidation. Fiscal restriction should be combined with prolonged monetary easing to keep aggregate demand on a path that supports an economic upswing at low inflation rates. To provide a guideline for the fiscal consolidation path, independent institutions should provide estimates of the degree of fiscal restriction that would permit the central bank to leave interest rates unchanged. Actual fiscal restriction should be close to, but not go beyond this benchmark. Consolidation paths within monetary unions, in particular the EMU, should as a rule be translated into national consolidation paths

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2010

    Fighting Sovereign Debt Crisis Worldwide

    Providing transparency on the balance sheet and off-balance sheet items Increasing capital requirements significantly Incorporating all financial institutions into the regulatory framework

    Providing transparency on the balance sheet and off-balance sheet items Increasing capital requirements significantly Incorporating all financial institutions into the regulatory framework

    Polity, Business
    Proposal
    Symposium 2010

    Guidelines and Recommendations for Successful Budget Consolidations

    The following proposed lessons and solutions are mainly based on empirical findings for the OECD countries. They are separated for five specific fields of action, i.e.: the budget and its composition, ...

    The following proposed lessons and solutions are mainly based on empirical findings for the OECD countries. They are separated for five specific fields of action, i.e.: the budget and its composition, budget institutions and procedures, new rules, politics and soft factors. The economic crisis of 2008 and 2009 strongly affected consolidation efforts. This fits with the long-run empirical findings which identified socio-economic factors like economic growth as the most important determinants of budget consolidations. However other institutional and political factors matter also.   1. The Budget and its Composition Cutting down expenditures is much more successful than increasing revenues. However,

    Polity
    Proposal
    Symposium 2010

    Create a European Monetary Fund

    Now is the time to set up a European Monetary Fund (EMF) to provide a framework for liquidity or insolvency crisis in the euro area. The existing €860 billion facilities for Greece and the euro stab ...

    Now is the time to set up a European Monetary Fund (EMF) to provide a framework for liquidity or insolvency crisis in the euro area. The existing €860 billion facilities for Greece and the euro stabilisation mechanism should be merged into the EMF. Experience has by now shown that without a clear framework, decisions about how to organise financial support typically have to be taken hurriedly, under extreme time pressure, and often during a weekend when the turmoil in financial markets has become unbearable, making a full bailout the only option. The existing European Financial Stability Faciity is to be

    Polity, Academia, Business, Civil Society
    Proposal
    Symposium 2010

    Fighting Sovereign Debt Crises Worldwide

    Governments should avoid sovereign debt crises by (i) formulating a fiscal rule and (ii) establishing an international debt commission to implement it. This commission should be given the final say ov ...

    Governments should avoid sovereign debt crises by (i) formulating a fiscal rule and (ii) establishing an international debt commission to implement it. This commission should be given the final say over public deficits and surpluses. Fiscal policy must be reformed to satisfy the following prerequisites: (a) The national debt ratio (ratio of national debt to national product) must remain stable over the long run. (b) Governments must be able to fight large recessions with large fiscal expansions, extending beyond the automatic stabilizers of the tax and benefit systems. (c) Governments must be required to give up their sovereignty over

    Polity, Academia, Business, Civil Society