Causes of the Sovereign Debt Crisis Essay

2436 Words Sep 18th, 2012 10 Pages
In the immediate aftermath of the financial meltdown in 2008, the global crisis has made an important shift. By then not the private banking sector, from where the financial crisis originally emerged from, but sovereign states face the risk of default. In order to analyse the multifaceted character of the European sovereign debt crisis, this essay focuses on its systemic causes. Contrary to the argument of popular Northern European politicians and journalists that blame the inability of Southern European states to manage deficit spending, the Eurozone crisis is firstly determined by imbalances in the European Monetary Union, and secondly by imbalances in the global political economy. This paper argues that the vast amount of sovereign debt …show more content…
Beginning with an analysis of the systemic issues in the European Monetary Union, the design of the EMU differs significantly from Robert Mundell’s and Ronald McKinnon’s criteria of an ‘Optimum Currency Area’ (Manolopoulos, 2011). The unequal development in Eurozone member countries requires an adjustment mechanism that smoothens out imbalances between surplus- and deficit nations (Grahl, 2011). This mechanism would replace the ‘usual’ adjustment in form of currency devaluation in deficit countries against currencies in surplus countries. Because a fixed exchange rate automatically fixes competition between economic sectors of member-states (Conquest & Bruges Group, 2011), the following five criteria need to be ensured in order to adjust imbalances (Mundell, 1961).
Firstly a currency union needs to have a flexible labour market. Labour from deficit countries cannot be restricted to move to areas with more successful industries. This factor prevents unemployment to rise in deficit areas and skill shortages to occur in surplus countries with faster growing economies. Within the European Union however, labour mobility was relatively low. According to a report by the European Central Bank, “in 2000, only 0.1% of the total EU-15 population (or 225,000 people) changed official residence between two member countries“ (Heinz & Ward-Warmedinge, 2006). Furthermore most of labour mobility was due to an influx of

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