The fundamental, and at times, passionate debate about sovereign debt is a predictable part of the sequencing of the financial crisis rumbling through the west.
The crisis has exposed three big fault lines in our fiscal systems. First, it broke the banking system, the fixing of which has extracted a heavy cost. Second, it shocked western economies, depriving governments of significant tax revenues. Third, it exposed the fragility and unsustainability of public finance arrangements, by reminding us of the existing and enormous future budgetary costs associated with rapid ageing. It is no accident that the sovereign debt crisis has come to roost in four OECD economies facing the largest expansion of age-related spending: Greece, Portugal, Ireland and Spain.
These three fault lines are structural problems that require structural solutions. The banking system will not mend without structural change in the financial services industry. A significant portion of the tax revenues will not come back, unless new sources of economic growth are found. And the fiscal consequences of ageing cannot be sustained without reforming labour markets and pension systems.