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Monetary Policy and the Challenge of Economic Growth, South African Reserve Bank, Conference Series 2012, pp.1-51, 2012
Following the leverage binge in advanced economies (AEs) over the three decades preceding 2008, debt growth is generally likely to be low in the years ahead. Deleveraging is likely to continue to weigh heavily on growth in highly indebted economies, and the deleveraging process will be costlier and take longer unless adequate policies are implemented to support it. Debt in the non-financial sector of AEs has almost doubled as a share of GDP between 1980 and 2008 – a period during which GDP grew rather briskly. I initially grew more strongly in the private sector, but only for public debt shot up sharply after the 2007-09 North-Atlantic financial crisis. Since 2008, debt growth has slowed by a third in real, and by half in nominal, terms. It would have fallen even more sharply if public debt growth had not more than doubled. The speed of deleveraging varies widely in different countries and sectors. On average, household and non-financial corporate debt has fallen, while public debt is still rising. Private (and sometimes public) deleveraging has generally been faster where GDP and income growth have held up, and is impeded by weak income growth in countries where deleveraging pressures are intense, such as in Greece, Ireland, Portugal or Spain. Safe debt is rapidly becoming an oxymoron. Hangovers from credit booms are serious. Increases in debt can cause systemic crises which generally tend to be both long-lived and costly. Large increases in debt also make such crises more painful – we find that the ‘GDP loss’ relative to trend in the aftermath of financial crises is almost twice as large in countries which had a large pre-crisis increase in debt than in countries that did not. Today, growth is weakest, on average, in countries with the largest pre-crisis debt increases. But even when debt does not cause a major crisis, debt reduction through higher saving rates tends to be contractionary because the poor coordination of deleveraging, saving and investment decisions give rise to Keynes’s ‘paradox of thrift’. Deleveraging – shrinking balance sheets – occurs when households, businesses or the public sector either desire to save more or are forced to do so. Economic actors may want to save more, or may be forced to save more by a combination of illiquid assets and restricted access to external funding or because their net worth is perceived to be inadequate. Both net worth and gross debt therefore matter for saving and deleveraging behaviour. Some of the costs of deleveraging are likely unavoidable, but policies can help to reduce the avoidable costs of deleveraging. First among those is access to liquidity. A well-capitalised banking system would be a good start, but the private provision of liquidity – a public good - in crises is usually highly inefficient, so central banks will likely retain a key role in liquidity provision for the coming years. Mechanisms to allow the gross deleveraging, i.e. the ‘netting’ of assets and liabilities, especially among banks and other financial intermediaries, should be encouraged. Where higher financial surpluses are required, policies should encourage higher saving rather than lower investment. Extensive debt restructuring for governments, banks, and in some countries also households, using yet-to-be-created orderly debt restructuring mechanisms, is both desirable and likely. In the medium-term, the lessons should be clear. First, to better coordinate saving and investment decisions, while supporting financial markets with more effective and sustainable fiscal and monetary policies. Second, on the liability side of any balance sheet: more equity, less debt.
A common explanation for the European debt crisis has been that the introduction of the euro in 2001 caused interest rates to fall in those countries where expectations of high inflation previously kept interest rates high. Bond buyers assumed that a bond issued by any government in the European Monetary Union was equally safe. As a result, the interest rates on Greek, Italian, etc. government bonds were not significantly different from the interest rate on the German government bonds. Governments responded to the low interest rates by increasing their borrowing. However, data do not endorse this explanation, as is shown in the paper. An alternative explanation has been that the European debt crisis was just a consequence of the American subprime one. Again, data do not entirely support this hypothesis although the connection between both crises is explored in the paper. A third argument states that the introduction of the euro, and its effects on external competitiveness, triggered mounting disequilibria and debt accumulation in the noncore countries or periphery. This argument seems to be valid to a certain extent just in the cases of Greece and Portugal, but not for the rest of the countries involved in the crisis where other factors seem to have played a major role. A distinction is made between a first group of countries whose debt problems have roots before 2007 but did not worsen significantly after that year and a second one of ¨new¨ highly indebted countries. Finally, Spain appears as a special case. The development of the indebtedness process in these three different types of countries allows isolating the factors which were determinant in each case. The conclusion is that the European indebtedness process does not accept a unique explanation and its solution will necessarily require resource transfers from the rich to the indebted countries of the euro-zone.
European debt crisis cause disruption of the Macedonian financial sector, which was manifested by a decline in real GDP, decline in exports, tightening of financing and increased debt. The problems are even greater if we know that the European crisis was followed by the global financial crisis of 2008, whereby may state that devastating effects are even greater and more destructive on euro scale but also in the Macedonian economy, too. Issues about the effects of the European debt crisis are very interesting and actual because, there are still not finished and may accumulate negative outcome for both, the European Union and the Republic of Macedonia. The main objective of this thesis is to investigate the problems and future challenges generated by the European debt crisis on the Macedonian financial and real sector, which can be ascertained by monitoring the following variables: movement of the real GDP, indebtedness, the trade deficit in the balance of payments. The results shows that regarding current circumstances, Republic of Macedonia should focus on stimulating private sector as the main generator of economic growth, debt reduction and rational spending as well as an increase in lending, i.e. expansionary monetary policy.
RePEc: Research Papers in Economics, 2014
2012
This paper analyzes the main macroeconomic indicators since 1995 in selected European Union countries as well as in the eurozone. Based on a comprehensive comparative analysis of net international investment position, current account and the debt level in some sectors of the economy, the paper found that there is a trend towards a divergence process instead of the intended real convergence process in the EU countries. In addition, in line with the present significant deterioration of public finance, the paper provides a comparative analysis across the individual countries in the eurozone. The study came to the conclusion that countries that lost their competitiveness had external deficits, which caused fiscal deficits, including public debt. Since the creation of the European Union these countries have ignored the rules set out in the Stability and Growth Pact, which has led to fiscal unsustainability. In order to put the economy on a balanced, sustainable and strong economic growth...
Investigacion Economica, 2010
2010
The global economy has reached the peak of a cycle of expansion, fueled mainly by the appreciation of residential properties in the United States. In Europe, with the exception of Germany, the collapse of real estate prices in 2007 led the economy into recession due to the cumulative nature of the process of wealth and income adjustment. Thus, this article aims to analyze the structural causes and changes in the global economic scenario which led to the crisis triggered in 2007, in addition to analyzing the crisis that now grips Europe with the decline of the euro against the dollar, with Portugal, Ireland, Italy, Greece and Spain (PIIGS) sinking into external and fiscal deficits in high public debt close to or above 100% of gross domestic product (GDP).
International Journal of Business and Economics Research. Vol. 3, No. 2, 2014,, 2014
This paper researched on the causes, current consequences and potential implication of the European debt crisis. The crisis was found to be a result of factors including international trade imbalances, the effects from the global crisis 2007-2012 and the failure in bailout approaches to cure Europe from the global financial distress. This has caused panic across the world due to the fact that negative financial situations in peripheral countries in Europe might further demolish the global financial markets. Even though significant growth was presumed from the introduction of Euro, the financial crisis resulted in sharp rise in bond yields, CDS, cross-correlation and spillover effects across bond markets of the Eurozone. Yield curves of the GIIPS countries acted as a cluster; differentiating from stronger and more stable economic forces. In addition, crisis resulted in significant dip of market confidence on Euro and depreciation of Euro against major currencies. Commodity prices i.e. spot price of gold rose to almost 300% over the time crisis period, utilized by governments as a defense mechanism against the economic downturns. Potential problems that might arise from this severe crisis and financial prospects of European states as well as governments over the world are also assessed and discussed.
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