Discussion Paper

Euro Area Spending Imbalances and the Sovereign Debt Crisis

Abstract: Euro area periphery countries borrowed heavily from abroad in the run-up to the sovereign debt crisis. How were these funds used? In this post, we recap our recent Current Issues study, showing that pre-crisis borrowing by the periphery countries (Greece, Ireland, Portugal, and Spain) went mainly to finance private consumption or housing booms rather than productivity-enhancing investments. Most analysis of the crisis has focused on the need for fiscal adjustment in the periphery. A look at the drivers of the run-up in foreign borrowing, however, suggests that private spending in the periphery will also need to move to a lower plane. The fact that debts were built up without adding to these countries? productive capacity is likely to make the needed adjustment in spending all the more difficult.

Keywords: euro area sovereign debt crisis current account balance external borrowing;

JEL Classification: E2;F3;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2012-05-02

Number: 20120502