Debt Crisis: Causes and Consequences

Public discussion and the media have put the global debt crisis right at the centre of attention. The discussion, however, is unduly focussed on public indebtedness as the dominating cause. As a consequence, the appropriate remedy is seen in restricting public expenditure. Yet this ignores important causes of the debt crisis: structural problems – high and rising current account deficits and unemployment – in those countries that are most affected, the impact of the global financial crisis, and deficiencies in the design of the monetary union. In most countries public debt ratios had, indeed, risen at a breakneck pace for decades, but not in the decade before the debt crisis, and not in two of the most affected countries. Debt ratios skyrocketed only after 2008, as a consequence of the global financial crisis, as a result of bank rescue packages and recession-caused tax deficits. Financial markets and rating agencies suddenly worried about structural problems and about debt ratios which they had ignored before in other countries.