ECON 319 Lecture Notes - Lecture 6: Fiscal Union, European Central Bank, Euro Convergence Criteria
9 Feb 2017
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Document Summary
Slide 6 the ongoing economic, financial and political crisis in europe. 3 basic building blocks: optimal currency areas. Conditions are: lots of trade between countries, sometimes (but rarely) similar external shocks. Bond-holder worry when: debt is very high seems impossible to reduce, when implicit backstop is no longer apparent repayment is not going to happen: debt dynamics. D = x + (r - g)d d = debt (% of gdp) history: accumulation of past budget deficits. x = primary budget deficit (% of gdp) current fiscal policy. Impact on growth rate. r = real interest rate usually low, fear of default (high d & x) makes it rise. Not all debt is the same. g = real gdp growth rate negative during a recession. Never large, (2-3%): policy options, greece defaults (leave euro zone?) Ugly: european banks loses, financial crisis, need for gov. intervention, raises taxes, cut spending (which worsen recession.
