Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh
Chapter 16: The European Stability Mechanism: Some notes on a new EU institution designed to avert financial crises
The severe international financial crisis and economic downturn that was sparked by problems in the US sub-prime mortgage market and compounded by the failure of Lehman Brothers led to a widening in budget deficits and higher public debt to GDP ratios in many countries. This reflected not only lower public sector revenues and increased expenditures to shore up aggregate demand, but it also led to a need to lend support to troubled financial institutions and create measures to check the risk of financial panic. As the financial and economic situation worsened, investors became increasingly risk averse and risk-evaluation became very difficult. In a number of countries the turmoil in the banking sector seems to have only been tempered by large infusions of government financial intervention that, in turn, aggravated the sovereign debt picture. For some European countries the deterioration in borrowing conditions seemed to go beyond what underlying economic fundamentals might have called for in more normal times.
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