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.

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