The Sovereign Debt Crisis and Options for UK Fiscal Policy Analysis

This report provides an in-depth analysis of the UK's economic performance following the global financial crisis, focusing on the sovereign debt crisis and its impact on key economic variables. It examines the UK's GDP growth rate, unemployment rate, inflation rate, interest rate, balance of trade, and consumer confidence from 2010 to 2019, illustrating the fluctuations and trends in these metrics. The report also discusses the fiscal policies employed by the UK government to stabilize the economy and suggests additional measures, such as increased investment in infrastructure and private sector projects, to promote economic growth. Furthermore, the report provides recommendations for the governments of Italy, France, and Greece, offering potential solutions to promote economic growth within their respective economies in the wake of the financial crisis.

Running head: THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
The Sovereign Debt Crisis and Options for Fiscal Policy
Name of the Student
Name of the University
Author note

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
EXECUTIVE SUMMARY
The aim of this study is to analyse the major economic variables of the UK post global financial
crisis. This paper also suggests some policies for the UK government to revive the economy
other than fiscal policy. The paper also includes the solutions for the French, Greece and Italian
government to promote economic growth.

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................4
The condition of the major economic variables since 2010........................................................4
Effective policies to promote growth........................................................................................10
Recommendations for Italian, French or Greek government....................................................13
Conclusion.....................................................................................................................................14
References......................................................................................................................................16

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Introduction
One of the severe financial crisis was the financial crisis of 2007-08. It is also called the
2008 financial crisis and global financial crisis (Bénétrix, Lane and Shambaugh 2015). The
effect of the financial crisis spread all over the world. In comparison with the Great Depression
of the 1930s, it is the second most severe financial crisis of the world. It was started in 2007.
There was a serious crisis in the subprime mortgage market of the United States (US). Later, it
spread to all countries of the world and developed as international banking crisis. Moreover, the
financial crisis also led to the collapse of the Lehman Brothers, an investment bank on 15th
September 2008. The financial crisis of 2007-08 increased the credit risk worldwide (Lennartz,
Arundel and Ronald 2016). It also impacted the economy of the United Kingdom (UK). Situated
on the mainland of the Europe, the Northern Ireland and United Kingdom of Great Britain are
together called the United Kingdom. It is one of the developed country of the world. However,
there was an impact of the global financial crisis on the UK. After the financial crisis hit the
world, it led to the sovereign debt crisis in the Europe.
There were several problems that hit many countries of the Europe after the global
financial crisis of 2007-08. In addition, these problems were higher government debt, collapse of
the financial institutions and rapidly increasing bond yields spreads in government securities. In
addition, the crisis was highest between 2010 and 2012 (Cowling, Liu and Zhang 2016). It was
started with collapse of the banking system of the Iceland. Though, the sovereign debt crisis was
unable to affect the economy of UK directly. As the Eurozone affected by the debt crisis. It also
influenced the economy of UK indirectly. The UK economy was hit badly by the decision of
Brexit. It resulted in European crisis. Moreover, in order to solve the problem of credit crisis.
There were a wide range of fiscal and monetary policies undertaken by the central bank of the

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
countries in order to prevent the collapse of the financial system of the world during the financial
crisis of 2007-08. Despite the implementation of the different policies, it brought consequences
like global economic downturn. It is known as the global recession.
Discussion
The condition of the major economic variables since 2010
Figure 1: GDP growth rate of the United Kingdom from 2010 to 2019
Source: (Tradingeconomics.com 2020)
Figure 1 represents the GDP growth rate of the UK from 2010 to 2019. Historically, the
GDP growth was highest in 2012 during the period of 2010 to 2019. On the other hand, the GDP
growth rate was lowest in 2013 and 2019 during the same period. In the third quarter of 2019, the
GDP growth rate was 0.4, which was slightly improved form the previous quarter. The
improvement in GDP growth rate resulted from the larger contribution by the net trade and
household consumption. On the contrary, there was adverse effect of government expenditure

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
and gross capital formation to GDP growth rate (Claessens and Van Horen 2015). Graphically,
the country witnessed a severe fluctuations in GDP growth rate from the period of 2010 to 2014.
Later, the rate of fluctuations was somewhat stable. Though, the current growth rate is weakest
since 2nd quarter of 2012.
Figure 2: Unemployment rate of the United Kingdom from 2010 to 2019
Source: (Tradingeconomics.com 2020)
Figure 2 shows unemployment rate of the UK from 2010 to 2019. As of October 2019,
the unemployment rate of the UK recorded at 3.8%. During the period of 2010 to 2019, the
unemployment rate was all-time high in 2012. Whereas, the unemployment rate was all-time low
in 2019 during the same period. Graphically, the unemployment rate took a downward trend after
its highest peak in 2012 (Claessens and Kodres 2014).

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Figure 3: Inflation rate of the United Kingdom from 2010 to 2019
Source: (Tradingeconomics.com 2020)
Figure 3 illustrates inflation rate of the UK from 2010 to 2019. As of December 2019, the
inflation rate of the UK stood at 1.3%, which was decreased from the previous year. It is the
lowest rate of inflation after the rate of November 2016. Historically, the rate of inflation was
record high in 2012 during the period of 2010 to 2019. While, the inflation rate was record low
in 2015 during the same period (Vazquez and Federico 2015). The inflation rate of the country
remained fluctuating in nature.

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Figure 4: Interest rate of the United Kingdom from 2010 to 2019
Source: (Tradingeconomics.com 2020)
Figure 4 shows interest rate of the UK from 2010 to 2019. As of December 2019, the
bank rate of the country stood at 0.75%. The bank rate was fixed by the monetary policy
committee of the Bank of England. The economy of the UK faced various issues such as Brexit
uncertainty and slow growth in the job market. Historically, there was no change in bank rate
from 2010 to 2016. The interest rate of the country was highest in 2019. On the other hand, the
interest rate was lowest in 2017. After 2016 onwards, the interest rate of the country was
fluctuating in nature. Many countries around the world adopted the Basel III liquidity and capital
standards amid the global financial crisis of 2007-08 (De Haas and Van Lelyveld 2014).

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Figure 5: Balance of trade of the United Kingdom from 2010 to 2019
Source: (Tradingeconomics.com 2020)
Figure 5 represents balance of trade of the UK from 2010 to 2019. In November 2019,
the country registered a trade surplus of 4.03 billion GBP. However, the UK witnessed a trade
deficit in previous year, which was 1.34 billion GBP. Graphically, there was a severe
fluctuations in balance of trade of the country during the period of 2010 to 2019.

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Figure 6: Consumer confidence in the United Kingdom from 2010 to 2019
Source: (Tradingeconomics.com 2020)
Figure 6 illustrates consumer confidence in the UK from 2010 to 2019. The consumer
confidence remained lower since 2013. The condition is deteriorated by the uncertainty of the
Brexit. As the uncertainty of Brexit reduced in recently, it improved the consumer confidence to
-11 as of December 2019. It was lower in previous month, which was -14. During this period, the
consumer confidence was fluctuating in nature. Historically, it was highest in 2016 and lowest in
2013.
The sectors of the UK that hit dramatically by the global financial crisis were DIY and
furnishing sectors (Riley, Rosazza-Bondibene and Young 2014). As a result, the sale of the retail
sector dropped sharply. As the credit crisis aggravated, it affected the financial institutions and
banks. Therefore, banks and financial institutions curtailed the lending process. Businesses were
unable to get the financial support from the banks. Moreover, the profitability and sales of the
businesses also influenced by the global financial crisis. There was significant impact on the

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
youth unemployment rate of the country. In UK, the youth aged between 18 and 24 suffered
mostly due to increased unemployment rate. As a result, the government revenues collected from
the taxes also plummeted because of higher unemployment rate and lower retail sales (Agnello
and Sousa 2014). The country witnessed significant economic downturn. The GDP decreased by
1.5% in the fourth quarter of 2008 in the UK. Hence, a period of recession started in the UK. The
influence if the recession also continued in 2009 as well. Though, there was a concern about the
magnitude of the economic recovery in the UK economy. In the final quarter of 2009, the GDP
of the country stood at 0.3%, which means there was sight improvements. The economic
condition affected the confidence the consumers as well as investors. The investment banks were
the biggest losers in the global financial crisis of 2007-08.
Effective policies to promote growth
One of the essential tool to promote economic growth is fiscal policy. In order to,
influence the economy of a country, government used measures such as controlling expenditure
and collecting revenue, which is known as fiscal policy (Bhattarai and Trzeciakiewicz 2017).
There is wide application of fiscal policy in political science and economics. It is mainly came
into effect during the period of Great Depression. The fiscal policy is implemented by the
respective government of the countries. Government controls economic growth with the help of
government spending and changes in the level of taxation either by increasing or decreasing the
tax rate. Thus, it changes the levels of aggregate demand in the country. As a result, it influences
the economic activity of the country (Ozturkª and Sozdemirᵇ 2015). Therefore, with the help of
fiscal policy, the government of all the countries tried to fulfill the economic objective during the
period of global financial crisis of 2007-08. In addition, the fiscal policies can also be used in
order to control the inflation rate of the countries. The healthy level of inflation is 2% to 3%. It

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
also controls the unemployment rate of the country. The main objective of the fiscal policy is to
keep the GDP growth rate at 2% to 3%. In addition, it also tries to keep the unemployment rate at
4% to 5%, which is known as the natural rate of unemployment.
The UK government took fiscal policies to stabilize the economic growth of the due to
credit crisis (Gov.uk 2020). In addition, the country also adopted monetary measures to boost the
economic growth. Despite, implementation of these policies, there are certain issues that are
unresolved. To pace up the economic growth of the country. It would be suggested to focus on
the weaker section of the industries. After the global economic crisis, the country registered a
stagnant economic growth. Furthermore, one of the key tool that can applied by the government
is controlling the spending of the government on infrastructure (Lane and Milesi-Ferretti 2018).
It is important to focus on increasing the investment in the private sector. One of the important
sector of the economy is infrastructure. The multiplier effect of the infrastructure sector is also
large. The contribution of this sector is significant on the economic growth of the UK. Therefore,
higher private sector investment will lead to higher economic growth in UK.
The higher investment in private sector project boosts the productivity of the business
and curtail the costs of businesses (Bickes, Otten and Weymann 2014). Many projects add value
to the economic growth of the country. Likewise, attracting investment from the private sector is
also essential. Moreover, higher investment by the private sector also boosts the confidence of
the consumers and businesses. As the consumer confidence was comparatively low in the
country. In order to increase the consumer confidence, it is essential to focus on private sector
investment (Quaglia and Royo 2015). According the trade statistics of the UK, the country
suffered from a trade deficit. Thus, it acted as detrimental to the economic growth of the country.