Econ Test 2 Part 9

  1. Two reasons why some European governments have too much debt
    • 1. the government itself had been a long-time overspender: Greece is clearest example.  Funded generous social programs but tax revenue was low b/c of low GDP and high tax evasion
    • 2. rooted in the private sector: Ireland and Spain are clear examples.  Both had low gov't debt before Great Recession, but had huge housing bubbles, which busted.  Gov't stepped in, borrowed lots of money from other countries, and bailed out banks
  2. Solutions to the debt crisis
    • Debtor country austerity: cut spending, raise taxes
    • Haircuts for lenders/investors: stretch out payments/forgive part of the debt
    • Emergency loans: from EU or IMF
    • Break uo the euro zone: kick some out or stop using all together
    • EU wide financial regulation: set common standards for bank capital requirements and lending rules
    • Changes in fiscal policy: tigher fiscal controls
  3. Debtor Country Austerity: pros and cons
    • Pros: reduces deficit/need to borrow.  frees up money to pay back current debt
    • Cons: very painful.  voters may vote out the austerity gov't.  can drag down trade partners' growth.  one-sided policy that lets lenders escape the consequences of their poor lending
  4. Haircuts for lenders/investors: pros and cons
    • Pros: fairer.  may be only way to get debt under control
    • Cons: could cause bigger crisis in short run. investor confidence shaken
  5. Emercency Loans: pros and cons
    • Pros: helps finance country debt in short run
    • Cons: some countries are bailing out others
  6. Break up the euro zone: pros and cons
    • Pros: euro would become more stable.  less investor fear
    • Cons: massively dissruptive in short run
  7. EU Wide Financial Regulation: pros and cons
    • Pros: banks in 1 country can't make reckless loans to cause unfair bailouts and transfers between countries
    • Cons: cuts into member-county sovereignty.  not a short-term answer for problem
  8. Changes in fiscal policy: pros and cons
    • Pros: could cut down on future problems
    • Cons: reduce countries' sovereignty
Card Set
Econ Test 2 Part 9
Econ Test 2 Part 9