Lessons we have learned from the crisis, by Jordi Galí
What is the European debt crisis?
“What has happened in Europe – or more specifically in some peripheral EU countries – is that at a certain point investors lost confidence in the ability of the governments of these countries to repay all the debt they had accumulated. This loss of confidence makes it difficult for these countries to refinance their debt.”
“Faced with this unsustainable situation and the risk that some or all of these countries could go bust, the European Union was forced to act. This action came in the form of financial assistance and macroeconomic adjustment programmes.”
“These bailouts, or at least some of their constituent elements, clearly violated what were viewed as two pillars of the Treaty on the Functioning of the European Union. The first pillar, contained in the Treaty, is the no-bailout clause, which states that in no circumstances shall EU member states or the EU as a whole be required to assume liability for a member state’s debts and bail it out. [...] The second key element was an explicit prohibition of government debt monetization. What does this mean? It means, in principle, that the central bank cannot finance the deficit of any member of the monetary union.”