Abstract

In 2009, the condition of public finances around the world, including the Euro area, deteriorated dramatically. The skyrocketing public debt and deficit the Euro area aggregate deficit increased threefold was, as many economists claimed, the price that had to be paid for assistance extended to banks and for expenditures in supporting economic growth. The cumulative deficit rose to levels unseen in Europe since the 1970s. Some finance experts argue that the soaring deficit and debt should not be attributed solely to irresponsible fiscal policies pursued by specific Euro area countries, but that they can be traced back to what governments had to do to mitigate the effects of the financial and economic crisis. The increasing Euro area debt was an inevitable consequence of the assistance rendered to banks and of the costs attributed to the array of packages designed to stimulate the economy. As a result, financial markets were increasingly reluctant to lend to banks, or even governments. To restore trust in the markets it was first necessary to restore the health of government budgets, primarily by reducing the state budget expenditures. It soon became clear that budget cuts would not be enough to overcome the crisis and that structural reforms would be required. Due to this situation, the following fundamental questions arise: 1. How can the trust of the markets be regained? It is the causes of doubt that need to be addressed, and not just the symptoms. 2. What can the Euro area do to restore trust? This paper will discuss the causes of the increasing debt worldwide and in the Euro area, as well as identify projects that should be carried out in order to reduce deficits and debts, along with regaining the trust of the markets once again.(original abstract)