From late 2009, some fiscally troubled economies such as Greece, Portugal in the Eurozone triggered another round of financial crisis, the European sovereign debt crisis. Some non-Eurozone countries such as Iceland were also affected. Greece has the highest budget deficit among these countries which reached 15.4%. Ireland and Spain’s budget deficit are also 14.3% and 11.2% respectively. There are three potential causes of the crisis that have been discussed. The first one is the heavy government spending and stimulus plans that used to maintain the financial stability and growth engine after the US crisis. The second one is that these Eurozone countries also relied heavily on external financing to fund domestic debt. For example, Greece built up a large budget deficit already before the crisis (Nelson, Belkin and Mix, 2010).  Greece had a budget deficit of 5% of GDP compared to only 2% as an average figure in Eurozone starting from 2001. The third one is the overreliance on financial sector. Some European countries developed successful financial sector and strong financial interdependence with other countries, which made them vulnerable to economic crisis. For instance, Ireland has a remarkable history of successful real estate and financial industries. The slump in the houses prices trouble the financial sector as the economic volatility hits. The story of US financial crisis is revisited below along with the discussion of the potential causes. Then the causes and implications of European sovereign debt crisis are also illustrated. The reasons why the crises of these small economies have such considerable impact on the global economy are discussed. This is followed by the responses of governments so far.

The root of the whole story of European sovereign debt crisis is the US subprime crisis resulting from the burst of housing market bubble. The US economy was experiencing the most serious crisis in 2007 and suffered from the deepest recession since the Great Depression of the 1930s. However, the real estate was not the only attribute of the crisis. Thanks to securitisation which helps packs mortgages all together, the sale of these securities can help the original owners diversify and make a profit from simply selling them. The fact was that these securities have large amount of systematic risk that had not been taken into account by the credit rating agencies. Investors including individuals and corporations were actually buying risky assets with a label of high credit rating such as AAA or AA rating. When the interest rate went high, some house owners were unable to pay their mortgage any more. The owners of the mortgage, the securities owners, rather than the banks initially lend out the mortgage were suffering the losses. The crisis led to severe problems for major Wall Street financial institutions. Leman Brothers was collapsed and Merrill Lynch and Bank of America were in financial distress. The market was much more stringent on the lending since financial institutions need to maintain the liquidity urgently. The consequence of the insufficient liquidity results in the so-called credit crunch that has considerable implications for the entire global economic system.

Because of globalisation and securitisation, the scale of the crisis was immense and fears were spread all over the world. One of the prominent damage that the crisis created was large number of layoffs. For example, the unemployment rate in the US had been reached as high as 10% in 2009 and is still currently 1% less. There is also significant slump in the house prices, especially in the US. The condition of credit crunch did not only hit the mortgage market but also adversely affect other non-financial corporations since banks are reluctant to finance their future investments and operations. With the difficulty of obtaining bank loans, some corporations can turn to commercial paper market in order to meet their short-term obligations. However, to reflect the state of credit crunch, the rates were unprecedented high. The governments and central banks as the last resort of financial instability carried out a number of stimulus and bailout plans for both the banking system and other non-financial sectors. By 2010, some countries such as US were technically were out of crisis. For instance, the US GDP growth rate turned positive for the first time since crisis in the fourth quarter in 2009. However, the global financial system was still fragile and the situation has evolved beyond the financial markets. In 2010, the side effect of the crisis triggered another round of crisis in Eurozone, the European sovereign debt crisis.

The European sovereign debt crisis is an extension of the US financial crisis. However, there is a socialisation of the debts since they shifted from the private sector to the public one and the focus is on government rather than finance industry. In May 2010, the next chapter of the financial crisis was emerging across Europe. The speculative pressures were substantial both in Eurozone countries such as Greece, Portugal, Ireland and Spain and non-Eurozone nations such as Iceland. For example, the Greek government was having difficulty in paying its debt and was in need of a large amount of bailout fund. Moreover, banks that were holding tens of billions in sovereign bonds from these financial distressed countries experienced severe slump in their bond values. For example, a Belgian Bank, Dexia, was having the same problem and was nationalised in order to cope with the crisis. There are several potential reasons that led to a severe explosion of fiscal deficits European sovereign debt crisis. First, governments have carried out large scale of bailout plans and stimulus plans for subsidizing not only the banking system and other non-financial industry. Second, as a result of credit crunch and general problem of liquidity, governments experienced a considerable increase in the cost of repaying debt, especially those which are recognised as financial distressed economies. Third, governments also experienced significant slump in the tax income due to recession. Countries such as Greece received bailout fund from other countries and banks such as European Central bank. For instance, a considerably large financial package of 750 billion Euros was utilised to support the Euro by creating the European Financial Stability Facility. Therefore, due to the massive financial aid across Europe, the meltdown of the Greek, Spanish and Portuguese economies was temporarily avoided.

The reason why the US financial crisis in 2008 can cause such a considerable impact on the global economy is mainly that the US is the centre of global capitalism. For example, the crises such Asia crisis in 1997 and Argentina 2001 were mainly affecting the peripheral countries or other emerging markets and creating little impact on the core economies such as the US and UK. Based on the logic, the European sovereign debt crisis shall not put too much pressure on global economy. However, it is the crisis of these relatively small economies that generate such wide and severe impact on the global economy.

First, the European sovereign debt crisis has become full circle. The increasing credit risk of Greece was causing problems for other core economies such as Germany and France. These core economies were holding a large amount of government debt from Greece as they need to lend to Greece in order for Greece to buy the products from them. Second, the internal investment within the Eurozone makes one party vulnerable to the potential recession of the other party. For example, the fund from Germany was an important source of property prosperity in Greece and Spain. For this reason, the meltdown across the Eurozone would cause a banking crisis in Germany. Third, the crisis raise doubts about the integrity of the European Union and the invention of Euro. It is claimed that the European Union does not have sufficient conditions for a single currency to work. The crisis in some countries could potentially drag down the whole Eurozone. Although the exit of countries in crisis from the European Monetary Union is unlikely to happen, such crisis does raise a number of implications for the world leader and future Europe. Fourth, due to the globalisation, the crisis happening in the Euro would also generate significant pressure on some developing countries such as China which replies on earning cash from exporting to Europe. The extended crisis further depresses the confidence of those export oriented companies located in the developing countries since the US financial crisis. Fifth, the crisis aggravated the world economy which is already in the middle of a severe economic recession. The crisis could potentially slowdown the recovery of the global economy in the short term.

Therefore, the consequence of the crisis was no longer internal within the Eurozone. The European sovereign debt crisis was of concern for the whole global capitalism. In May 2010, the US president Barack Obama insisted that the more fund had to be mobilised to impress the markets and stop bleeding confidence. Even the Chinese Premier Jiabao Wen has warned that the debt crisis might spread globally if proper actions had not been taken. For instance, the depreciation of Euro could influence the US economy in at least two ways. First, the crisis could lead to the decrease in the US exports to Europe, which will worsen the US trade deficit. The export growth has always been a main drive for the US economy for the previous decade. A dramatic rise in Euro can considerably hurt the confidence of US recovery. Second, if the debt crisis continue to spread, the core of Europe, France and Germany, would be affected. Then the US banks which have considerable stakes in the European core would be hit.

There is at one consensus for all governments on the responses to the crisis, austerity. They proposed to reduce the public spending in the help of reducing debts, the reform of labour markets and privatisation. They also tend to reduce the public sector pay and increase the pensionable age. Some capital spending projects are also cancelled and deferred indefinitely. Apart from these economies in crisis, the UK also implemented a set of austerity measures proposed by the Chancellor of Exchequer, George Osborne. The plan proposed dramatic government spending cuts and reform on some national welfare system. However, the measures described above have at least two problems. First, it is argued that the reduction in public spending would cause another recession or much slower recovery. Second, citizens in the countries that are financially distressed may still not compromise politically. For example, Greece has a number of rounds of protests against the public spending cuts since it would greatly affect their living standard. Strikes and demonstrations were also held in Spain, Portugal and Italy.

There exist some potential alternative approaches to alleviate the effect of the crisis. Although exit from the European Monetary Union remains rarely an option for these fiscally troubled countries, debt structuring and attract foreign investments are still feasible options. For example, it is always in China and US’s interests to give out a helping hand. However, the Prime Minister of Greece Papandreou claimed that the debt restructuring would have damaging effect on Greek banking system and Greek families.

All in all, the crises starting from 2007 has made huge impact on the global economic system and welfare of the citizens across the countries in crisis. Although the Eurozone has implemented some emergency measures for the short term, some long-term reforms are also proposed. For example, Eurozone has to solve the problem of current account imbalances i.e. capital flows need to be regulated and structural imbalance should be solved. Moreover, Eurozone nations should be responsible in their fiscal policies. There should be more regulations on how they design their government budget and risk management policies. If the current austerity measures taken by the global leaders do not have the desired effect, the debt crisis would continue to spread over with more damages. As a last resort of the crisis, governments and central banks have more to do to maintain the financial stability.


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Nelson, R., Belkin, P. and Mix, D., 2010. Greece debt crisis: overview, policy, responses, and implications. Congressional research service.

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原文链接:European sovereign debt crisis