IB Economics SL 3.1.4 Business cycle Question Bank

Study the extract below and answer the questions that follow.
Eurozone debt crisis

(1) A debt crisis in Europe has caused financial markets to watch government plans to deal with the issue of rising government debt.

(2) Governments have borrowed heavily to bring the 16 nation eurozone* out of its first recession and debt levels are expected to be well above the European Union (EU) limit of 60 % of gross domestic product (GDP). Average eurozone government debt could reach 84 % of GDP in 2010. Germany, long considered a model of fiscal discipline, forecasts government debt at around 78 % of GDP in 2010 while, in Greece, government debt of 120 % of GDP is expected.

(3) The combination of larger budget deficits, low economic growth and support for the banking sector has caused higher public debt levels. Eurozone governments have been urged to reduce debt. The increase in debt is raising the cost of borrowing for many countries and adding to the cost of repayments in future budgets.

(4) With unemployment rising and weak growth expected in 2010, officials cannot count on increased tax revenues for much help in paying off debt, much of which is owed to other countries. Possible policy solutions include cutting welfare spending or raising the retirement age to reduce future government costs. Alternatively, the member countries of the EU and the International Monetary Fund (IMF) may need to give money to the countries in danger of default.

(5) The debt crisis is limiting government finances and potential growth. Government revenue will be further limited by an aging population that will need expensive health care in the years to come. Many countries have pledged to tighten fiscal and monetary policies. However, this may damage an economic recovery.

(6) Failing to act on the deficits and debt may, however, spark a negative reaction from financial markets that will demand higher interest payments on loans. The Prime Minister of Greece has warned: "Either we eradicate the debt, or the debt will eliminate the country".
* eurozone: the group of countries which use the euro as their common currency eurozone-debt-crisis-looms-20100103-lnap.html]

Define the following terms indicated in bold in the text:

recession (paragraph (2)