Current Issues in Economics and Finance

Saving Imbalances and the Euro Area Sovereign Debt Crisis

Volume 17, Number 52011
JEL classification: F15, F32, F34, F36

Authors: Matthew Higgins and Thomas Klitgaard

For several years prior to 2010, countries in the euro area periphery engaged in heavy borrowing from foreign private investors, allowing domestic spending to outpace incomes. Now these countries face debt crises reflecting a loss of investor confidence in the sustainability of their finances. The result has been an abrupt halt in private foreign lending to these economies. This study explains how the periphery countries became dependent on foreign borrowing and considers the challenges they face reigniting growth while adjusting to greatly reduced access to foreign capital.

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