The European Union’s Debt Crisis: New Sustainability Regulations for Debt Reduction and Prevention

Abstract:

As a result of the financial and economic crisis, the public debt in numerous EU member states has been estimated at well over 60% of gross domestic product (GDP). Several highly indebted member states will not be able to markedly reduce their indebtedness before 2025; they should introduce reductionary measures as soon as possible to address their budget deficits in order to remain creditworthy.

Debt reduction based on higher inflation, on the other hand, should be avoided based on macroeconomic considerations. The upper limit applied to budget deficits, namely 3% of GDP, has encouraged indebtedness to increase in many cases. This limit should be eliminated and replaced by a regulation, which judges changes in indebtedness based on economic growth. The EU Commission should be responsible for monitoring and sanctions.