“Unsustainable debt is unsustainable”
On 21 January 2011 CASE had the pleasure to host professor Juergen von Hagen, who spoke about the Euro Area Dept Crisis at a CASE Policy Research Seminar.
In his presentation “Solving the Euro Area Debt Crisis: What will work and what won‘t” Mr. von Hagen, Professor of Economics and Director of Institute for International Economic Policy at University of Bonn, explained the European mechanisms of fiscal policies coordination in the EU and its development in the past years. The speaker explained that as a result of the crisis, the markets have only now realized that the debt is both “external” and “domestic”, which was visible with the spread fluctuations. He also highlighted that the sovereign debt crisis can lead to a banking crisis and in fact inflates the conflict between European solidarity and the sovereignty of the member states in terms of fiscal policies. Also, as the result of the Euro Area Debt Crisis, the “no bailout clause” included in the Treaty on EU proved not credible.
“Unsustainable debt is unsustainable”, professor von Hagen said, “and temporary solutions such as throwing money at the debtor, will not work”. According to the speaker, the solution of closer budgetary surveillance and, in fact, increasing the taxes, as proposed by the EC, does not put the necessary incentive on the long-term growth. On the other hand, the solutions of issuing Euro Bonds or establishing the Euro Bailout Fund will lead to excessive borrowing. As a solution to the crisis, Professor von Hagen, presented the European Crisis Resolution Mechanism; which would consist of three institutions: The European Court of Default, The Economic Body and The Financial Body.
