ECON 319 Lecture Notes - Lecture 4: Eurozone, Government Debt, Periphery Countries
9 Feb 2017
School
Department
Course
Professor
Document Summary
Saving imbalances and the euro area sovereign debt crisis. What: for several years leading up to 2010, countries in the euro area periphery (greece, Ireland, portugal, spain) engaged in heavy borrowing from foreign private investors. Faced with a debt crisis, the euro zone suffered from a loss of investor confidence, resulting in a halt of private foreign lending and a spike in interest rates. The underlying problem: instead of supporting productivity-enhancing investments, the borrowed foreign capital was used to support domestic consumption. Domestic spending outpaced incomes large saving imbalance. Why: entry in the european economic and monetary union facilitated foreign borrowing. As the peripheral countries joined the euro zone and adopted the common currency, interests rate fell (borrowing became cheaper). This is due to the fact that investments in those countries became safer from erosion, as their currencies could no longer depreciate relative to the euro.
