Towards a Sustainable Growth Model for Europe: Institutional Framework * SEBASTIAN DULLIEN The Problem: Dangerous Debt Trends The current financial and economic crisis has highlighted once again that a sustainable growth path cannot be achieved with permanent growth of indebtedness in single sectors or countries. A debt-driven expansion, re­flected in ever-rising debt levels, has to come to an end at some point and usually harbors the danger of a debt crisis. Such crises are usually associ­ated with major disruptions of normal business activities; sharp cutbacks in expenditure in individual countries – necessary to reverse unsustain­able debt trends – risk triggering a recession in their trading partners as well. As the imf confirms in its Autumn 2010 World Economic Outlook, a financial crisis also often leads to permanent losses in output, thus mak­ing it even more undesirable than normal recessions. Based on the experience of the past 24 months, within the European context, three levels of debt at the national level seem in need of control: net government debt, gross debt in the financial sector, and net liabilities of a country against the rest of the world. Besides the argument that excessive debt levels of single countries or sectors will at some time stifle growth and thus are not desirable, there is an additional rationale for controlling the government debt of emu part­ner countries, namely direct external costs to the rest of emu . The danger of a default by the government of one emu member state must be con­sidered an issue of common concern in the monetary union. In fact, this argument has become even stronger after the crisis: as the events of the crisis have shown, the financial institutions of the Eurozone are very much interlinked. Hence, problems in one country’s banking sector will immediately have dire consequences for the rest of the monetary union. * The paper is based on an impulse statement at the international seminar»Cohesive Growth in Europe after the Crisis«, organized by the Friedrich-Ebert-Stiftung, Berlin, October 23, 2009. 36 Dullien, A Growth Model for Europe ipg 1/2010