Sovereign Bankruptcy in the European Union in the Comparative Perspective

Leszek Balcerowicz

No WP10-18, Working Paper Series from Peterson Institute for International Economics

Abstract: This paper distinguishes four alternative sovereign debt resolution mechanisms: pure market solutions, modified market solutions, crisis lending by the IMF and other institutions, and the proposed Sovereign Debt Restructuring Mechanism (SDRM). It is hard to find--at the general level of analysis--the unique advantages of SDRM. The assessment of the European Stabilization Mechanism will ultimately depend on its operation, especially whether it will be a tool of subsidizing countries in debt distress or an instrument of fiscal crisis lending. The present fiscal problems in the eurozone are due to the erosion of fiscal discipline and not to the lack of strong compensatory transfers within the eurozone. The right model to look at the conditions for the stability of the eurozone is not a single state but the gold standard-type system, a system of sovereign states with a (de facto) single currency. Based on this analogy and considering modern developments, three types of measures are needed to safeguard the stability of the eurozone: (1) measures that would reduce the procyclicality of the macroeconomic policies and of the economy; (2) reforms that would help the eurozone economies grow out of increased public debt; and (3) steps to increase the flexibility of the economy so that it can deal with the future shocks in a better way.

Keywords: Debt Resolution; European Union; Eurozone; Financial Crisis; SDRM (search for similar items in EconPapers)
JEL-codes: F00 F02 F55 H6 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-eec
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Citations: View citations in EconPapers (6)

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