The foreign debts of the European countries are at the core of the current crises. Generally, the crises are attributed to government budget deficits in excess of the values stated in the Stability and Growth Pact (SGP)/Maastricht treaty. Proposals for reform generally involve increasing the powers of the European Union to monitor fiscal policies of the national governments and increasing bank regulation. My article is concerned with the following issues. [Q1] How can one explain the inter country differences in the debt crisis in Europe? Is there a single explanation, cause? [Q2] Specifically, were the crises due to government budget deficits or to the private sector? The answer will determine what is the appropriate policy to prevent a recurrence. [Q3] The Stability and Growth Pact/Maastricht Treaty and the European Union focused upon rules concerning government debt ratios and deficit ratios. They ignored the problem of “excessive” debt ratios in the private sector that led to a crisis in the financial markets. Neither the markets nor the Central Banks anticipated the crises until it was too late. My basic questions are: What is an “excessive” private sector debt ratio that is likely to lead to a crisis? What are theoretically based, not empirical ad hoc, Early Warning Signals (EWS) of debt crises? The answers determine to a large extent how one should evaluate proposals for economic reform, to avert future crises?
