Vol 9 (2012) - Issue 4

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The Neverending Story of Europe’s Sovereign Debt Crisis

I. Introduction
As it enters its third year without resolution, the sovereign debt crisis in the Eurozone remains the greatest source of uncertainty for any prospect of a sustained global economic recovery. Since 2009, rising levels of government debt and consequent credit rating downgrades in the region have generated extraordinary stock and bond market volatility, provoking unprecedented monetary policy interventions and government austerity. With near-term pressure abating somewhat in economies such as Greece and Ireland, the shift in international focus to Spain, Italy and even France has prompted calls for a change in strategy and a reemphasis on growth and stimulus rather than thrift and cut-backs.
In the aftermath of June’s landmark announcement of a bespoke bailout for Spain’s banking sector,1 an assessment of the current status of the Eurozone’s debt position is opportune. In particular, it is worth evaluating the effectiveness of regional and domestic measures to stem a crisis which had a heterogeneous set of causes at its core, from persistent government deficits in states such as Italy to costly banking sector bailouts in economies such as Ireland. With the European Central Bank emerging as a central protagonist in resolving the current crisis, this article will also provide a preliminary assessment of the steps already taken at an inter-governmental level to pre-empt future emergencies. Measures such as government bond purchases and the Fiscal Compact offer only partial responses to address the current crisis and pre-empt the next one. The importance of these issues could not be greater at a time when the future of the world’s largest economic bloc hangs in the balance.
The remainder of this paper will be structured as follows: part II will provide a brief overview of the contributing factors to Europe’s current debt emergency; part III will examine the divergence in economic trends that has taken place across the Eurozone since the single currency’s inception; part IV will offer analysis of the incomplete framework that governs the Eurozone and the role of the European Central Bank; part V will explore the rescue funds that Eurozone leaders have created in the last two years to support the region’s financial stability; part VI will evaluate the substance of Europe’s Fiscal Compact; and finally part VII will assess the introduction of Eurobonds as a panacea for Europe’s ills.

II. A brief history of Europe’s sovereign debt crisis
1. A global financial crisis goes European
The twists and turns of Europe’s sovereign debt crisis have dominated news headlines across the world for almost two years: to explore each and every meander would be a challenging and gruelling exercise.2 Nonetheless, there are certain inflection points at which a globalised financial crisis, beginning with the collapse of the subprime mortgage market in the USA, assumed a particular European dimension.