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Foreign debt versus domestic debt in the euro area

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  • Daniel Gros

Abstract

The aftermath of the 2008 financial crisis has led to a sharp rise in public debt throughout the developed world. The problem is particularly acute within the euro area, where several governments needed financial assistance from the International Monetary Fund and the European Stability Mechanism. This paper argues that public debt poses much greater problems when it is owed to foreigners, i.e. when it constitutes foreign debt. This view implies that the key to overcoming the euro crisis is in the external adjustment, not the fiscal adjustment. Another implication is that in a crisis a strong fiscal adjustment is desirable, not because it can immediately reduce the public debt/GDP ratio, but because it reduces domestic absorption and thus reinforces the external adjustment. Copyright 2013, Oxford University Press.

Suggested Citation

  • Daniel Gros, 2013. "Foreign debt versus domestic debt in the euro area," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(3), pages 502-517, AUTUMN.
    • Handle: RePEc:oup:oxford:v:29:y:2013:i:3:p:502-517
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