DOOM LOOP

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Context: Recently, the European Central Bank (ECB) called an emergency meeting for a doom loop. Many economists have warned that Europe may be headed for a doom loop

Details:

What is a doom loop?

A doom loop is the circle of vulnerability where a country’s banking system can be severely hurt by volatility in the economy.

Impact:

• A country is at risk of a doom loop when a shock to one part of its economic system is amplified by its effect on another.
• Thus resulting in a contraction in lending provided by the banks.
• This contraction in credit, in turn, slows the domestic economy, resulting in a further deterioration in the price of the sovereign’s bond issues.
• A government under financial stress may have to cut spending or raise taxes when the economy is weak. That in turn can aggravate fiscal problems.
• The circle can also be activated by external forces such as a slowdown in global economic activity due to natural recession or trade friction.

https://www.economist.com/the-economist-explains/2022/06/22/what-is-the-doom-loop-in-the-euro-zone