Debt to GDP ratios are irrelevant (or : why Japan is not in such a difficult fiscal position)

Over the past few years the “Japan is going to default” theme has proven quite popular both in blogs and regular financial media. It’s true that the headline number (over 200% debt to gdp !) is eye-catching – as it’s 3 time more than most developed nations.

But this number is also very misleading, and this post will (hopefully) explain why Debt to GDP ratios are irrelevant when assessing a nation’s likelihood to default. I’ll use two groups of countries to illustrate the points made : Japan and Greece (very high debt to gdp), and Germany, Canada & USA (similar and average debt to gdp), to show that they all have very different risk profiles.

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Is the Euro-zone headed for a break up ? (3/3) – Solutions


Solutions that are unlikely to work

The bailouts did not solve any of the issues of the euro-zone. The divergences in productivity, growth, current account deficits and inflation trends are still there and without tackling with them there can be no long term survival of the euro. Some solutions often touted are unlikely to solve those structural issues, either because they are politically unacceptable, or because they attempt to prevent the next crisis rather than to tackle with the problem at hand.

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Is the Euro-zone headed for a break up ? (2/3) – Fundamentals

The EMU has brought enough positives to be defended

The Euro has by no means been a disaster. It has met its main goal of price stability, did help to get lower interest rates and probably helped growth by helping capital flows. Had it not existed, the European Union would in the past two years have been convulsed by a more extreme version of the currency instability that rocked it in the early 1990s. The single market would have been under serious threat.

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Is the Euro-zone headed for a break up ? (1/3)

Since late 2009, it has become fashionable for pundits and financial commentators to argue that the euro is headed for a breakup – partial or total. It started to be taken seriously when one of founding fathers of the euro (Otmar Issing) said in Feb. 2010 that “starting monetary union without having established a political union was putting the cart before the horse.  Now the question is whether monetary union can survive without such a political union.”

How likely is the eurozone to really break-up ? How to analyze european policies’ impact on a potential break-up ?

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