Fletcher in the News

Prof. Michael Klein on the European Debt Crisis

European Sovereign Debt Crisis Causes

When the monetary union was formed, the countries involved agreed to fiscal requirements called the Maastricht accords, also known as the convergence criteria. The agreement required that government debt not exceed 60 percent of the country's gross domestic product, or GDP, and that the budget deficit amount to no more than 3 percent of GDP.

"They were broken almost immediately, by other countries as well as France and Germany, so people didn't pay much attention to them," says Michael Klein, professor of international economic affairs at The Fletcher School of Law and Diplomacy at Tufts University.

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In 2009 when the full extent of the problems in Greece came to light, banks all over Europe that had bought piles of Greek debt suddenly had a lot less liquidity and began having trouble finding credit. In Spain and Ireland, the banking problems were compounded by bursting housing bubbles.

"There's a real estate crisis in Spain, so you have very high unemployment now because of the collapse of the construction sector," Klein says. "In Ireland, there's a real estate bust as well, and that imperiled a lot of banks and the government was put in a bad situation because the way the government raised revenues was through turnover taxes. When you sold a house you paid a tax and since the real estate market was so active, they got a lot of revenue from that." With the advent of the real estate bust, that source of revenue dried up.

Read the full article and read more from Prof. Klein on the debt crisis' impact on the U.S.