This Commentary argues that the current crisis in the eurozone periphery is really about foreign debt, not sovereign debt and that the single-minded concentration of the EU and the IMF on fiscal adjustment in the EU periphery is misguided. For Greece, fiscal adjustment is undeniably the key issue. For Portugal, however, the key problem is the private sector’s continuing external deficit. Ireland is different again, as it has very little foreign debt and will soon run a current-account surplus. Its government should then no longer need external financing, provided it can mobilize its own citizens’ savings. In short, fiscal adjustment is a necessary but insufficient response by a country to extricate itself from a debt crisis. Fostering domestic savings, and getting citizens to buy bonds of their own government instead of keeping their money abroad, is just as important.
Director Daniel Gros is the Director of CEPS.