Wednesday, February 3, 2010

Recession and Debt:

You may have thought that only the United States is in debt but we are also hearing (a news report) that the European Union is also mired in debt due to the severe recession that is stretching the budgets of those countries to the breaking point. Case in point is that of Greece, European Union rule says that budget deficit should be no more than 3 percent of the GDP, but Greece’s budget deficit is more than 13 percent of its GDP.

After Greece, it is Spain, Portugal and Ireland which have their budget deficit way above the 3 percent limit. It is not only these countries but the best performers (France and Germany) whose budget deficit is above 3 percent.

This recession has really taken a toll on rich and poor countries alike. Due to the recession, more people are out of work and clamoring for social services which increases the need to pay out more money and support these jobless people which in turn increase the budget deficit. In addition to this help, there is a need to have a loose monetary policy by keeping interest rates low enough for the banks to lend money but high enough that excess and cheap money does not create inflation. Even if now the recession is coming to an end, unemployment is still at stubborn high levels which will necessitate continued support to the jobless and loose monetary policy for a while.

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