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Europe Has a Plan to Avert a Sovereign-debt Crisis

If only the union’s member states and parliament would approve it

In recent times, spending due to COVID pandemic and the war in Ukraine pushed debts even higher.

For decades, the European Union has been failing at one of its most fundamental tasks: ensuring that the finances of its member states don’t threaten the viability of the common currency. The longer the dysfunction persists, the greater the chance that rising government debts will trigger a new crisis.

After much delay, EU officials devised an ambitious plan to achieve better discipline. Months of discussion then followed. Europe’s leaders now need to get behind it. The proposal isn’t flawless, but it’s a vast improvement on the status quo.

For all its benefits, the common currency has a critical weakness: If a member state borrows beyond its means, it can disrupt other members’ economies and even undermine the entire union. To prevent this, the EU adopted fiscal rules known as the Stability and Growth Pact. Among other things, member states agreed to keep their budget deficits and sovereign debts below 3 percent and 60 percent of gross domestic product, respectively, and submit to fines if they failed.

It didn’t work. In 2003, Germany and France, Europe’s two largest economies, were among the first to violate the deficit limits. In the early 2010s, extreme debts in some member states — most notably Greece, where government obligations reached more than 180 percent of GDP — triggered a crisis that nearly broke up the euro area.

More recently, spending due to the pandemic and the war in Ukraine pushed debts even higher. Inflation has disguised the scale of the problem by boosting nominal GDP, hence restraining measured debt ratios — but the fiscal prospects are grim. As of the end of 2022, Italy’s obligations stood at about 145 percent of GDP, with no plausible prospect of getting back down to 60 percent at any point in the next couple decades.

Source: Money Control



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