International Lending, Sovereign Debt and Joint Liability
An Economic Theory Model for Amending the Treaty of Lisbon
As the Eurozone crisis drags on, it is evident that a part of the problem lies in the architecture of debt and its liabilities within the Eurozone and, more generally, the European Union. This paper argues that a large
part of the problem can be mitigated by permitting appropriately-structured cross-country liability for sovereign debt incurred by individual nations within the European Union. In brief, the paper makes a case for
amending the Treaty of Lisbon. The case is established by constructing a game-theoretic model and demonstrating that there exist self-fulfilling equilibria, which would come into existence if cross-country debt liability were
permitted and which are Pareto superior to the existing outcome.
This paper is a product of the Office of the Chief Economist, Development Economics Vice Presidency. It is part of a larger
effort by the World Bank to provide open access to its research and make a contribution to development policy discussions
around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors
may be contacted at [email protected] and [email protected].
About the Author
Initiative for Policy Dialogue (IPD)
Joseph E. Stiglitz is President of the Initiative for Policy Dialogue, and Chairman of the Committee on Global Thought at Columbia University. He is University Professor at Columbia, teaching in its Economics Department, its Business School, and its School of International and Public Affairs. He chaired the UN Commission of Experts on Reforms of the International Monetary and Financial System, created in the aftermath of the financial crisis by the President of the General Assembly. He is former Chief Economist and Senior Vice-President of the World Bank and Chairman of President Clinton’s Council of Economic Advisors. He was awarded the Nobel Memorial Prize in Economics in 2001.