The sovereign debt crisis in the euro area: Causes, consequences and policy responses

Abstract

The ongoing crisis, as reflected in the turmoil reigning in the European sovereign bond market, threatens to undermine the stability of the Eurozone (EZ). The concerns of international investors and market participants regarding the public debt sustainability of specific euro area member states provided us with the stimulus for the present study. The scope of the thesis is to investigate and identify in detail the factors that gave rise to the current crisis and examine its effects on the capability of several national governments to keep on servicing their debt in a sustainable way. Furthermore, we track all the actions taken against the ensuing disorder in the financial sector, both at national political levels and in the form of supranational cooperation between institutional key-role players. We find that pre-existing macroeconomic imbalances that grew constantly over the years, massive private debt accumulation by households and corporations which fed a subsequent bubble in the construction and real estate sector, and the fiscal mismanagement operated by some national authorities are at the very core of the crisis. An additional key element with its own dynamic in fuelling the crisis is the deficient original scheme of the euro and of the EZ as an Optimum Currency Area (OCA), as the study indicates. We conclude by demonstrating that the mix of austerity policies and bail-out programmes which has been widely implemented cannot be the solution to the existing problem, unless it is followed by deeper political and fiscal integration among EZ member states and a more flexible monetary policy by the European Central Bank (ECB).