Fiscal gaps: the immediate and permanent changes in the governments' financial position that are required to ensure that debt meets a specific target by a certain time

The storm approaches

Kevin A. Hassett 

At its core, the crisis is one of investor confidence, and it comes in response to sober analysis of the finances of southern-European countries. Their deficits are large; their future looks bleak because so many of them have enacted entitlement programs that grow without bound, and because the recent financial crisis put overwhelming strains on their near-term budgets.

As economists struggle over the design of reforms to restore stability to international financial markets, their starting point is to define the problem. While there can be much debate about how to achieve balanced budgets, the question of how much balancing is needed -- and in which countries -- is a matter of arithmetic.

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