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Moral Hazard in the Eurozone?

Gullberg, Hilda LU (2017) NEKN01 20171
Department of Economics
Abstract
The European sovereign debt crisis, which emerged in 2009, revealed unsustainable fiscal policies among several countries in the Eurozone periphery (Matthews, 2011). In fact, high debt ratios are a potential problem for a majority of the countries in the euro area, reaching an average ratio of 92.8 percent in 2015 (Eurostat, 2015). Theoretically, common pool problems and moral hazard within a monetary union create incentives for governments to increase public spending (Bovenberg, Kremers, Mason, 1991; Baskaran and Hessami, 2013). The Maastricht Treaty and the Stability and Growth Pact (SGP) were supposed to guarantee fiscal stability and prohibit bailouts to members in financial distress, but gained critique for being vague and incomplete... (More)
The European sovereign debt crisis, which emerged in 2009, revealed unsustainable fiscal policies among several countries in the Eurozone periphery (Matthews, 2011). In fact, high debt ratios are a potential problem for a majority of the countries in the euro area, reaching an average ratio of 92.8 percent in 2015 (Eurostat, 2015). Theoretically, common pool problems and moral hazard within a monetary union create incentives for governments to increase public spending (Bovenberg, Kremers, Mason, 1991; Baskaran and Hessami, 2013). The Maastricht Treaty and the Stability and Growth Pact (SGP) were supposed to guarantee fiscal stability and prohibit bailouts to members in financial distress, but gained critique for being vague and incomplete (Alves and Afonso, 2007). Thus, problems of moral hazard might have caused a tendency for governments to increase public spending as they joined the currency area (Bovenberg, Kremers, Mason, 1991). The behaviour of financial investors might also reflect moral hazard if an expected bailout led to unmotivated low risk premiums on government bonds of the Eurozone countries (Delener and Swaleh, 2012). This thesis investigates the euro´s impact on the fiscal balance and the long-term interest rate using panel data from 20 European countries spanning 1980 to 2015. The data is applied to a dynamic panel data model estimated with bias corrected OLS (LSDVC). The results suggest that primary balances and long-term interest rates of the European countries are mainly explained by macro-economic variables, such as GDP growth and unemployment, rather than the euro. Hence, the data in this thesis do not show statistically significant evidence for a problem of moral hazard in the Eurozone. (Less)
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author
Gullberg, Hilda LU
supervisor
organization
course
NEKN01 20171
year
type
H1 - Master's Degree (One Year)
subject
keywords
EMU, euro, moral hazard, European bonds, long-term interest rates, fiscal deficit, monetary union, financial crisis
language
English
id
8911768
date added to LUP
2017-07-10 13:53:44
date last changed
2017-07-10 13:53:44
@misc{8911768,
  abstract     = {The European sovereign debt crisis, which emerged in 2009, revealed unsustainable fiscal policies among several countries in the Eurozone periphery (Matthews, 2011). In fact, high debt ratios are a potential problem for a majority of the countries in the euro area, reaching an average ratio of 92.8 percent in 2015 (Eurostat, 2015). Theoretically, common pool problems and moral hazard within a monetary union create incentives for governments to increase public spending (Bovenberg, Kremers, Mason, 1991; Baskaran and Hessami, 2013). The Maastricht Treaty and the Stability and Growth Pact (SGP) were supposed to guarantee fiscal stability and prohibit bailouts to members in financial distress, but gained critique for being vague and incomplete (Alves and Afonso, 2007). Thus, problems of moral hazard might have caused a tendency for governments to increase public spending as they joined the currency area (Bovenberg, Kremers, Mason, 1991). The behaviour of financial investors might also reflect moral hazard if an expected bailout led to unmotivated low risk premiums on government bonds of the Eurozone countries (Delener and Swaleh, 2012). This thesis investigates the euro´s impact on the fiscal balance and the long-term interest rate using panel data from 20 European countries spanning 1980 to 2015. The data is applied to a dynamic panel data model estimated with bias corrected OLS (LSDVC). The results suggest that primary balances and long-term interest rates of the European countries are mainly explained by macro-economic variables, such as GDP growth and unemployment, rather than the euro. Hence, the data in this thesis do not show statistically significant evidence for a problem of moral hazard in the Eurozone.},
  author       = {Gullberg, Hilda},
  keyword      = {EMU,euro,moral hazard,European bonds,long-term interest rates,fiscal deficit,monetary union,financial crisis},
  language     = {eng},
  note         = {Student Paper},
  title        = {Moral Hazard in the Eurozone?},
  year         = {2017},
}