Federal Reserve Bank of San Francisco
Economic Letter
March 7, 2011
The euro area faces its first sovereign debt crisis, highlighting the fiscal imbalances of member countries. Troubled countries are implementing austerity measures, with adjustments focusing on the short and medium run. However, a long-run solution to Europe's problems requires economic reforms that increase competitiveness and reduce labor costs in the peripheral countries. Such reforms would promote convergence of the euro-area economies and enhance the long-run sustainability of monetary union.
Global markets have been shaken by the euro area’s first sovereign debt crisis. The International Monetary Fund’s programs of fiscal reform and financial assistance for Greece and Ireland mark its first such interventions in the euro area. Yields on sovereign bonds have increased sharply for Greece, Ireland, and some other countries. Divergences in those yields highlight the economic differences among euro-area countries and suggest that markets are questioning whether their governments will repay their borrowing in full. More fundamentally, questions have been raised about the sustainability of the 17-nation euro area as a monetary union.
This Economic Letter discusses the imbalances in the euro area and the policies designed to address the region’s economic and fiscal problems. These policies include austerity measures. But, more importantly, they need to encompass economic reforms that strengthen monetary union rules and safeguard the region from future crises.
More
See also the analysis at WSJ
No comments:
Post a Comment