A year following its onset the euro-area sovereign debt crisis continues unabated. Starting from Greece in autumn 2009, the crisis has since resulted in Greece’s withdrawal from international bonds markets and continues to put the bonds of Ireland, Portugal and Spain under significant pressure. To contain its fall-out, in May 2010 EU/EMU policy makers took extraordinary measures including an unprecedented in size (110 billion) EU/IMF-financed Greek rescue package; and the creation of a European stabilisation mechanism setting aside 750 billion euros for coping with crises similar to the Greek one over the next three years. These measures, however, have so far failed to calm markets, with the ongoing turmoil causing debates ranging from the crisis optimal short-run management to the euro’s long-term sustainability.
There is little doubt that the ongoing crisis in the market for Greek government bonds is a major test for the sustainability of the Eurozone. As such, it is certain to attract, in due course, considerable academic attention shedding light to its origins, mechanics and lessons. But with events still unfolding, time is of essence: Any insights to the crisis’ likely causes, mechanics and outcomes, even imperfect, are bound to be useful for the purpose of managing the crisis. When in unchartered territory academics’ typical initial response tends to be a first-pass assessment using tools available at hand. In a recent paper (Arghyrou and Tsoukalas, 2010a), we do precisely that. More specifically, we use insights from the literature on currency crises to offer the first, to the best of our knowledge, analytical treatment of the crisis’ causes, mechanics and likely outcomes.
First, we would like to clarify that we are strong supporters of the European monetary integration project. Our view is that the single currency involves significant potential economic and political benefits for all its participants which far outweigh its potential costs. We thus believe it is right to spare no effort to ensure the euro’s continued stability and success.
by Michael G. Arghyrou1 Economics Section, Cardiff Business School The European Central Bank (ECB) currently faces probably the most challenging financial and economic environment since its inauguration. Global inflation pressures compromise its institutional price-stability objective while the risk of the credit-crunch crisis spilling over to the euro-zone’s economy is real. The challenge for the ECB […]