Responses to Potential National Insolvency

Since 2007, there has been a series of financial shocks across the EU—at the household, firm and country levels—to which policy-makers have reacted vigorously with the aim of restoring confidence to the financial markets. But continuing turbulence in the euro area as a result of high budget deficits and high levels of government debt indicates that this aim has not been achieved.

Policy-makers and financial market participants are not agreed on whether fiscally vulnerable countries should be allowed an orderly debt restructuring, whether euro area rescue packages should make such restructuring superfluous or whether new policy approaches could obviate the need for restructuring without requiring rescue packages.

Which policy approaches are particularly promising? And how can the gap between market expectations and government policy responses be bridged?