THE DEBT CRISIS AND ITS IMPLICATIONS

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THE DEBT CRISIS AND ITS IMPLICATIONS

• Dai Bingran
• Centre for European Studies
• Fudan University

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I. What is Debt Crisis ?

• 1. Debt is a very common phenomenon in our daily
  economic life, and happens at all levels.
• Debt management may be the heart and art of
  management.

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• 2. A common way of debt settlement is to borrow
  new debt to clear old debthence the question of
  credit.
• It becomes a crisis only when the debt is no
  longer manageable.

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• 3. The current debt crisis refers to that happens
  in a number of Euro Zone countries, where the
  public debts are much too higher than allowed,
  and seem to be out of control

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country Budget deficit (as of GDP) Budget deficit (as of GDP) Budget deficit (as of GDP) Budget deficit (as of GDP) Public debt (as of GDP) Public debt (as of GDP) Public debt (as of GDP) Public debt (as of GDP)
country 2007 2008 2009 2010 2007 2008 2009 2010
Greece 6.5 9.8 15.8 10.6 107.4 113.0 129.3 144.9
Portugal 3.1 3.6 10.1 9.8 68.3 71.6 83.0 93.3
Ireland 0.1 7.3 14.2 31.3 24.9 44.3 65.2 94.9
Span 1.9 4.5 11.2 9.3 36.2 40.1 53.8 61.0
Italy 1.6 2.7 5.4 4.6 103.1 105.8 115.5 118.4
Euro Zone 0.7 2.1 6.4 6.2 66.3 70.1 79.8 85.4
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II. Why This Crisis

• 1. High government spending, especially in social
  welfare, and weak real economythe vulnerable
  links in the Euro chain.

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• 2. Public finance further weakened by the
  financial crisis and economic recession.

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• 3. Strong international speculationthe result of
  the abuse of Dollar supremacy

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• 4. Reluctance and hesitance of reactions in the
  Euro zone, as shown by the several European
  Council meetings

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III. Nature of the Crisis

• 1. It is not merely a question of money Euro
  Zone is not short of money, and internationally
  the problem is rather there is too much money.

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• II. It is a crisis not just of the PIGS
  countries, but rather of the whole Euro Zone and
  the EUEuro is a shared enterprise and a common
  destiny.

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IV. The Way out

• 1. To rebuild the market confidence by showing
  the Euro Zone muscles, and by enlisting
  international assistance.

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• 2. To mend the Euro (EMU) mechanisms
• --reestablishing the fiscal control
• --monitoring financial market movements
• --strengthening ECBs roles

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• 3. To adjust the economic structure and reform
  the social welfare models and policies.

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V. Implications

• 1. The crisis is not over yet, and it entails the
  retard of economic recovery and all its social
  and political impacts.

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Economic Forecast (2010-13)
EU (27) EU (27) EU (27) EU (27) Euro Zone (12) Euro Zone (12) Euro Zone (12) Euro Zone (12)
2010 2011 2012 2013 2010 2011 2012 2013
GDP growth 2.0 1.6 0.6 1.5 1.9 1.5 0.5 1.3
Consumption 1.0 0.4 0.4 1.1 0.9 0.5 0.4 1.0
Investment -0.3 1.9 0.8 3.0 -0.5 2.0 0.5 2.9
Employment -0.6 0.4 0.1 0.4 -0.5 0.3 0.0 0.3
Unemployment rate 9.7 9.7 9.8 9.6 10.1 10.0 10.1 10.0
Inflation 2.1 3.0 2.0 1.8 1.6 2.6 1.7 1.6
Budget deficit (as of GDP) 6.6 4.7 3.9 3.2 6.2 4.1 3.4 3.0
Public debt (as of GDP) 80.3 82.5 84.9 84.9 85.6 88.0 90.4 90.9
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• 2. The crisis might not necessarily be bad, if it
  pushes for reforms in the Euro Zone and in the EU.

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• 3. It might be of interest to see the subtle
  by-effects the crisis is likely to bring, say, to
  the relations among the member states and among
  the EU institutions.

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• It might also bring with it some international
  implications.