Chapter 2: The European Balance-of-Payments Problem

There are differing views on the causes of, and cures for, this crisis. At one end of the spectrum, some ultimately see it as a public debt crisis and advocate the strengthening of political constraints on government borrowing. Others primarily regard it as a confidence crisis, which should be addressed by setting up a very large rescue fund, i.e. by wielding a ‘big bazooka’. They count on the fact that, if the crisis is truly expectation-driven, the resources will never have to be used. This chapter begins by reconsidering these and other views, and later stresses the structural reasons for the crisis, particularly the loss of competitiveness on the part of some euro area countries and the resulting surge in private and public foreign indebtedness. The chapter closes with some policy conclusions and recommendations.