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Euro Area Spending Imbalances and the Sovereign Debt Crisis

Matthew Higgins () and Thomas Klitgaard

No 20120502, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Euro area periphery countries borrowed heavily from abroad in the run-up to the sovereign debt crisis. How were these funds used? In this post, we recap our recent Current Issues study, showing that pre-crisis borrowing by the periphery countries (Greece, Ireland, Portugal, and Spain) went mainly to finance private consumption or housing booms rather than productivity-enhancing investments. Most analysis of the crisis has focused on the need for fiscal adjustment in the periphery. A look at the drivers of the run-up in foreign borrowing, however, suggests that private spending in the periphery will also need to move to a lower plane. The fact that debts were built up without adding to these countries? productive capacity is likely to make the needed adjustment in spending all the more difficult.

Keywords: euro; area; sovereign; debt; crisis; current; account; balance; external; borrowing (search for similar items in EconPapers)
JEL-codes: E2 F3 (search for similar items in EconPapers)
Date: 2012-05-02
New Economics Papers: this item is included in nep-mac
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