For debt-stricken economies, ascending from near economic collapse can be a slow and painful process – but not impossible.
Below are three ways that struggling economies can stimulate their domestic economies and get the ball rolling again.
(for our corresponding piece on how economies slide into debt in the first place, read here.)
1.) Fortifying bond markets
Normally, when a country is in dire economic straits (think Greece, Ukraine, etc…), overly cumbersome national debt comes with the territory. And if a country wants to prosper economically, said debt should be kept within reason.
This is where sovereign debt issuances and other government bonds come into play.
Bonds – a type of security which offer investors fixed returns – are issued as a way to finance hefty government debt. By sourcing money from investors while promising a small rate of return, governments allot themselves some liquidity, in addition to keeping their debt under control.
Additionally, a strong bond market allows a nation to keep taxes low while continuing public spending; therefore protecting its citizens and domestic economy.
When bond markets are hit by an economic event (say, the 2008 housing market bubble) countries have even bought their own bonds in an effort to stabilize markets – this is an unorthodox practice called quantitatize easing.
2.) Manipulating interest rates
In a struggling economy interest rates for business loans and other government issuances are usually inflated, making it difficult for individuals and businesses to borrow money.
To help quell a potential slowdown that might occur governments – in the US, the Federal Reserve – will lower interest rates in hopes of encouraging more economic activity.
This method, however effective in the short term, has its pitfalls as well – like increasing inflation. Since cheap borrowing can inundate markets with an abundance of cash, lowered interests rates, if kept low for too long, can cause harmful amounts of inflation.
3.) Spending cuts (austerity measures)
Unfortunately, with floundering economies, a certain amount of public sector belt-tightening can and should be expected. This means budget cuts in arenas like education, social welfare, and infrastructure projects.
One particularly famous example of the effectiveness of public austerity measures can be seen from Canada in the 1990s. During this period the country reduced its public spending by 20 percent over four years, which proved to be quite successful in lowering its steep budget deficit.
As exemplified by recent Greek anti-austerity movements, however, these public spending cuts can often be unpopular with voters – making them tantamount to political suicide for legislators looking to institute such measures.
For further evidence, look no further than the US social security debate.