Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich discusses run up in public debt in the EU. The euro crisis shows how policymakers stumbled along, trying to put out fires without keeping an eye on where their chosen path was leading them. Currently, markets remain calm, but this is only the beginning of a new phase of the crisis, during which Europe will become mired in debt.
The new phase of the crisis is one of enhanced moral hazard, stemming from a run-up in debt. With investment risks largely collectivized by the bailout measures instituted by the ECB and the eurozone’s member governments, investors are once again accepting low yields, and borrowers are seizing the new opportunities.
View/Create comment on this paragraph There is nothing surprising about this: When a decision-maker can claim full credit for a policy’s benefits and collectivize the costs, he will pursue the policy sooner, more quickly, and to a larger extent than he would if he had to bear the costs alone. What is remarkable is how matter-of-factly Europe’s transgressors succeed in cloaking themselves with the mantle of a new social breakthrough.
CommentsView/Create comment on this paragraph One only needs to look at the United States to see how dangerous – and indeed unsustainable – the eurozone’s path has become. When one of the US states runs up too much debt, creditors become jittery and austerity measures are introduced to avert the risk of bankruptcy – as has happened in the past few years in California, Illinois, and Minnesota. But all of that occurs while the debt/GDP ratio is still minimal and clearly below 10%, because creditors know that no one will come to their aid. The Federal Reserve will not buy their government bonds, and the federal authorities will not issue any guarantees. In Europe, by contrast, easy access to the local printing presses before and after the foundation of the ECB, together with the new fiscal rescue mechanisms, ensure that investors start to become nervous only when debt ratios are 10-20 times as high. As a result, the debt level rises until it spirals out of control.
