Unsustainable sovereign debt—is the Euro crisis only the tip of the iceberg?

Abstract

As a direct e¤ect of the …nancial crisis in 2008, public debt began to accumulate rapidly, eventually leading to the European sovereign debt crisis. However, the dramatic increase in government debt is not only happening in European countries. All major G7 countries are experiencing similar developments. What are the implications of this kind of massive de…cit and debt policy for the long term stability of these economies? Are there limits in debt-ratios that qualitatively change policy options? While theory can easily illustrate these limits, where are these limits in real economies? This paper examines the relationship between sovereign debt dynamics and capital formation, and accounts for the e¤ects of the 2008 …nancial crisis on debt sustainability for the four largest advanced economies. We contribute to the literature on …scal sustainability by framing the problem in an OLG model with government debt, physical capital, endogenous interest rates, and exogenous growth. For the calibration exercise we extract data from the OECD for Germany as a stabilization anchor in Europe, the U.S., the U.K., and Japan for almost two decades before the 2008 crisis. Except for intertemporal preferences all parameters are drawn or directly derived from the OECD database, or endogenously determined within the model. The results of the calibration exercise are alarming for all four countries under consideration. We identify debt ceilings that indicate a sustainable and unsustainable regime. For 2011, all four economies are either close to-, or have already passed the ceiling. The results call for a dramatic readjustment in budget policies for a consolidation period and long-term …scal rules that make it possible to sustain su¢ cient capital intensity so that these economies can maintain their high income levels. Current conditions are already starting to restrict policy choices. However, the results also make it very clear that none of these economies would survive a second …nancial crisis such as the one in 2008.

Scientific or technological driving force? Constructing a system of national innovative capacity

“…In economic development, economic stability must also be emphasized (García-Heras, 2009). The 2008 financial crisis and European debt crisis caused massive damage to the economies and societies of countries worldwide (Bilkic et al, 2013;Rehman, 2015). In the current global economic interdependent system, countries must construct robust economic social systems capable of withstanding external impacts and unexpected events.…”