The Rising Public Debt in the EU: Implications for Policy

The current financial and economic crisis is of unprecedented proportions and intensity. Given the piecemeal approach of the EU institutions to economic policy, their reaction to the mounting crisis has been slow and hesitant.

The much feared financial meltdown in the E.U. has been avoided. However this came at the cost of increasing pressure on public finances in most member states, leading to a public debt crisis in a number of them. Financial liberalization and the lagging financial policy reform exacerbated such pressure, bringing certain member states such as Greece to the verge of default. Even more importantly, the stability of the eurozone appears to be in danger.

This has led to an avalanche of new measures, including the newly instituted “European Stabilization Mechanism”, as well as proposals for the adjustment of fiscal policy co-ordination, under the general heading of 'reinforcing economic governance in Europe' as announced by the European Commission in May 2010.

So, what next? Past experience confirms that a financial crisis is usually followed by a sovereign debt crisis. Is this what is happening in the EU? With what social and economic implications? Further, what are the implications of rising sovereign debt for economic policy?

These are some of the questions we discuss in the present article. In particular, we examine (i) the concept of the sovereign debt and its relevance to the EU and to the eurozone; (ii) the historical experience of crises; (iii) the response of the EU to the current crisis and (iv) the prospects for policy.

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