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International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon

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  • Basu , Kaushik
  • Stiglitz, Joseph E.

Abstract

As the Eurozone crisis drags on, it is evident that a part of the problem lies in the architecture of debt and its liabilities within the Eurozone and, more generally, the European Union. This paper argues that a large part of the problem can be mitigated by permitting appropriately-structured cross-country liability for sovereign debt incurred by individual nations within the European Union. In brief, the paper makes a case for amending the Treaty of Lisbon. The case is established by constructing a game-theoretic model and demonstrating that there exist self-fulfilling equilibria, which would come into existence if cross-country debt liability were permitted and which are Pareto superior to the existing outcome.

Suggested Citation

  • Basu , Kaushik & Stiglitz, Joseph E., 2013. "International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon," Policy Research Working Paper Series 6555, The World Bank.
    • Handle: RePEc:wbk:wbrwps:6555
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    References listed on IDEAS

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    Cited by:

    1. Foley-Fisher, Nathan & McLaughlin, Eoin, 2016. "Sovereign debt guarantees and default: Lessons from the UK and Ireland, 1920–1938," European Economic Review, Elsevier, vol. 87(C), pages 272-286.
    2. Basu, Kaushik, 2014. "Fiscal policy as an instrument of investment and growth," Policy Research Working Paper Series 6850, The World Bank.
    3. Schäfer Hans-Bernd & Bigus Jochen, 2016. "Consequences of Different Eurobond Proposals," Review of Law & Economics, De Gruyter, vol. 12(3), pages 523-553, November.

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    Keywords

    Debt Markets; Access to Finance; Banks&Banking Reform; Bankruptcy and Resolution of Financial Distress; Economic Theory&Research;
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