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By Nouriel Roubini and Arnab Das
Published: May 31 2010 20:41 | Last updated: May 31 2010 20:41
The largest financial crisis in history is spreading from private to sovereign entities. At best, Europe's recovery will suffer as the collapsing euro subtracts from growth in its key trading partners. At worst, a disintegration of the single currency or a wave of disorderly defaults could unhinge the financial system and precipitate a double-dip recession.
How did it come to this? Starting in the 1970s, financial liberalisation and innovation eased credit constraints on the public and private sectors. Households in advanced economies "“ where real income growth was anaemic "“ could use debt to spend beyond their means. The process was fed by ever laxer regulation, increasingly frequent and expensive government and International Monetary Fund bail-outs in response to increasingly frequent and expensive crises, and easy monetary policy from the 1990s. Political support for this democratisation of credit and home-ownership compounded the trend after 2000.
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