Impact of Government Debt on Economic Growth in the Euro Area

Document Type:Research Paper

Subject Area:Economics

Document 1

Beyond this point, the government debt is likely to bear a deleterious effect on the overall growth. Introduction Government debt has risen considerably in the recent past within the vast euro area. This move has been followed by the need of expanding the various governments in the region. Most industrialized countries were reported to have experienced increased government expenditure in the 20th century. Research indicates that the thirteen countries are making up the euro experienced remarkable growth from 12% GDP in the year 1913 up to 43% GDP in the year 1990. At the local level, the government debt was contracted to smaller extension order to cover various purposes in the country. Some of the instances where modern borrowing has been experienced include medieval Venice and Genoa where local governments were able to borrow from the available commercial banks.

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The United States experienced an increased government debt, more so in the 19th century in an attempt to increased funding meant for the improvement of public works. France, on the other hand, increased its debt levels in the period after 1878 with a similar attempt of increasing expenditure on public work as well as to enhance the colonial expansion of the country. Historians suggest that England may be considered to the country experiencing increased debt solvency about the manner it has been able to manage it whereas France can be said to be the most disturbed about dealing with national debt trends (Hole A. If this continues to be the case, such countries are e more likely to experienced remarkable financial issues about finding money that would prove to be substantial in funding the various projects facing the respective countries.

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This problem has been identified to be of crucial importance that t should be put under explicit and prominent surveillance within the EU stability and growth pact. In general, relevant measures should be put into place to strengthen the overall governance of the European Union. Different fiscal markets within and outside the European region have already begun reacting the deterioration in the financial situation facing various countries in the euro area by increasing their sovereign yield spreads (European Commission 54). Literature Review To date, very scarce literature exists about showcasing the relationship between economic growths a government debt. He further moves ahead to point out that “in spite of the easiest possible monetary policy with the whole structure of interest rates reduced to its lowest feasible level” (p.

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This therefore goes to show that the current generations are more likely to enjoy the various aspects that have been financed by public debt despite the fact that the future generations would be forced to work extra hard in order to ensure that its efforts in paying the outstanding debts do not necessarily mean that there will be instances of slowed economic development. According to Modigliani, the outstanding government debt can only be offset only when it is used to fiancé government expenditures that are likely to play a crucial role in generating real income for future generations. An example of such projects includes the formation of public capital (Hole A. R. All results obtained from the empirical model confirm a significant non-linear relationship between per-capita GDP growth rate and government debt ratio for the 12 euro countries in the study’s sample.

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This relationship has been showcased from the year 1970. Across all the models available, the debt-to-GDP in the inverted U-shaped relationship turns at about 90 and 100%i the 12 euro countries. Based on such a result, it is therefore important to note that the debt—GDP ratios of the respective governments of the sample population bears a negative relationship on their economic growth rates (Meade 54). Conclusion This research study was able to find significant evidence showcasing the non-linear effect of government debt on per-capita GDP rate of growth among the sample population (the stated twelve euro area countries) from 1970. M. Public Principles of the Public Debt, Homewood, Illinois. European Commission,. European Economic Forecast Autumn 2009, European Economy, No. 2009b. " Quarterly Journal of Economics, No. 107, pp.

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