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
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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.

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
Therefore, there was a persistent credit crisis in the country. As a result, the borrowing facility
was very lower in UK.
The savings rate in the UK was lower in 2008. It slowly improved from 0% to 7% in
2012. Moreover, the consumer spending in the UK was accounted for 63% of GDP. The
economic downturn in the country, forced the consumers to curtail their spending (Albertazzi
and Bottero 2014). As a result, it increased the savings rate. Therefore, lower purchasing power
led to economic stagnation in the UK. Here, the role of interest rate is vital. The interest rate may
influence the spending habit of the consumers. The central bank of the country may introduce
negative interest rate. Thus, the change in spending habit lowers the savings habit of the
consumers. As a result, the consumers start spending more and saving less. It boosts the
economic growth of the country.
The major financial crisis mainly affected the bank and financial institutions. Therefore,
it is important to revive the financial institutions and banks. The vital lending resources of the
country must be stabilized to boost the credit condition within the country. In addition, the
growth of the business and investment largely depends on the credit facility available in the
country. As the global financial crisis adversely impacted various large banks and financial
institutions (Di Mascio and Natalini 2015). In order to tackle the credit crunch of the country, the
small and local banks and financial institutions can be encouraged to offer credit to the
companies and corporations. In this scenario, they need to divert from their traditional line of
credit business and start playing in large competitive market. It would also be beneficial for the
small and local banks and financial institutions.
There are several sectors where intervention of the government was very high in UK
economy. Therefore, some sectors require deregulation and reduction of intervention by the

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
government (Bellelah et al. 2017). Higher regulations in some sectors increase the costs of
business. In addition, reduction of unnecessary regulations would encourage more competition in
the respective sectors. Deregulation of labor market of the UK is necessary to increase the
minimum wage, which in turn may rise the demand. It also may address the problem of higher
unemployment rate in the country. As the demand scales up, it also scale up the spending of the
economy. Hence, it enhanced the economic growth of the country.
Recommendations for Italian, French or Greek government
The France, Italy and Greece also hit by the global financial crisis of 2007-08. However,
the influence on these countries and consequences differs from each other. Therefore, the
solutions are also vary from the recommendations of the UK. The economy of Greek went
through huge troubles due to financial crisis and unable to return to fiscal health
(Hellenicparliament.gr 2020). One of the largest obstacle on the way of Greek government is
Euro. As the country was unable to manipulate the currency Euro. It would be better for the
country to return to drachma. It would help the government to stabilize the fiscal health of the
country. Another suggestion for the Greece is to liquidate. The country may offer a part or all
parts to the other countries of Europe and outside the Europe to revive the economy of the
country. In this bankrupted companies revives.
The debt burden carried out by the Greece and Italy were among the highest post
financial crisis. It was 102% and 109% of GDP in Italy and Germany respectively. The financial
crisis of the Greece was deeper and intense than the financial crisis of Italy. Greece decided to
come out of the bailout plan of the Europe. Since 2013, the general government debt of the Italy
somewhat stabilized and it was at 130% of GDP of the country (Bancaditalia.it 2020). The
weakness of the euro may help the countries like Italy. As it would strengthen the dollar and

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
influences the emerging markets. As a result, it would act in favor of the Italian government.
Another factor that may help the Italian government is higher yield from the bonds. Eventually,
the bond yields of the Italy started climbing up, which will also help other debt stricken
countries. The global financial crisis affected the economy of France. Thus, it led to the falling
economic growth and rising unemployment rate in the country. Post global financial crisis, Italy
only grown slower than the France.
The country may adopt the single budget of the Eurozone related to monetary union. It
would be beneficial for the country. In addition, the country should also implement the labor
market reforms in order to address the problem of youth unemployment in the country. The
country mainly suffered from the lack of flexibility in labor market and structural rigidity. Lower
wage is one of the vital problem in the French economy (Gouvernement.fr. 2020). The country
mainly dependent on the macroeconomic policy related to controlling inflation. However, it did
not bring any positive contribution in the France. Thus, the government of the country should
focus on reforms in supply side. The economy is mainly suffers from the supply side problems
not the demand side problems.
Conclusion
The global financial crisis started in largest bank of the US. Eventually, it spread to other
developed and developing countries of the country. It dramatically affected the advanced
countries of the world. It mainly resulted in credit crisis (Leite and Cortez 2015). Thus, many
countries were debt stricken. The global financial crisis also impacted one of the largest
economies of the world, UK. Since 2010, fiscal and monetary policies were adopted by the
government of the country in order to scale up the economic growth. In addition, to solve the
problem of the credit crunch in the country. There were some contradictions about the role of

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
fiscal policy in reviving the economy post global financial crisis. Hence, this paper suggests few
other solutions to the government of the UK to come out of the economic crisis. The government
may adopt policies like negative interest rate to control the credit crisis of the country.
The sovereign debt crisis also impacted the countries such as France, Greece and Italy
drastically (Karanikolos et al. 2016). Thus, this paper also suggests some solutions to the
respective governments of the counties. The Greece hit largely by the global financial crisis.
Thus, the government of Greek may adopt the policy like liquidate. It may offer a part or all parts
of country to other countries of the world to revive the economy. The government of France
should focus on labour market flexibility and control the supply side of the economy. Likewise,
Italy should also focus on economic reforms. Moreover, it may take help from the currency
devaluation. The lowering of the value of euro help the country to revive. Therefore, as the
intensity of the debt crisis differs in case of each country. The suggested solutions are also varies
from each other. Though, there is common goal for all, reviving economic growth of the
countries. Hence, the country may promote economic growth other than implementation of fiscal
policies.

THE SOVEREIGN DEBT CRISIS AND OPTIONS FOR FISCAL POLICY
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