Analysis Of The Distinctive Nature Of European Sovereign Debt Crisis

The outbreak of Greek sovereign debt crisis in late 2009, quickly spread into other countries in the Euro Zone, such as Ireland, Portugal, Spain, Italy and Cyprus, which then lead to the full blown of the European Sovereign Debt Crisis. It has been over 7 years since the outbreak, in the meantime, although core members of the Euro Zone such as Germany and France, world organizations such as European Union, European Central Bank and International Monetary Fund have all come up with various support and bail out measures to tackle and solve this crisis, countries in crisis also made extraordinary efforts on their own, the outcomes of these outside support and tight fiscal policy within, are less than satisfactory, and was unable to fundamentally resolve this crisis. The debt crisis continues and evolves, not only it has become the key obstacle in terms of the recovery and future prosperity of the entire European economy, but also casting a big doubt on the future of Euro as a currency, and the future integration process of the European Union. It is fair to say, European Sovereign Debt Crisis has become a major event that will heavily influence the future of European Union and will have a far reaching impact in world political arena.From the 80’s of the 20 th century to present day, the world has encountered debt or financial crises on several occasions, and was able to have those crises resolved within 1-2 years, then the question is, how could this European sovereign debt crisis be able to last for such a long time, the answer is imbedded within the distinctive nature of European sovereign debt crisis. Looking back to previous crises, Korea in 1980, Latin American countries in 1985, South Eastern Asian countries in 1997, and Argentina in 2001, these crises have a common nature, that they were the crises of foreign debts, on the other hand, the subprime mortgage crisis in the US was the crisis of domestic debts. When it comes to the case of European sovereign debt crisis, it seems like a foreign debts crisis, but not exactly. The crisis seems like a foreign debt crisis because countries in debt such as Greek, borrow their debt from foreign countries like Germany and France, however, the debt borrowed was all valued in Euro terms, and Euro is the “domestic currency” for all the indebt countries. In this sense, European sovereign debt crisis also seems like a domestic debt crisis, but again, not exactly. The source of debt for indebt countries like Greek were not from their domestic enterprises or households, but from foreign countries, and Euro may seem like “domestic currency” for those indebt countries, however these countries don’t’ have the authority to issue or manage the currency. Therefore, it is fair to say, European sovereign debt crisis is neither a foreign debts crisis, nor a domestic debt crisis, this European Sovereign Debt Crisis have some rather distinctive nature. Due to the distinctive nature of European Sovereign Debt Crisis, traditional approaches used to resolve foreign debt crises and domestic debt crises can’t have much effects on European Sovereign Debt Crisis, which is the fundamental reason for the crisis to continue until this day.Focusing on the distinctive nature of European Sovereign Debt Crisis, this thesis starts the discussion with Karl Marx’s classical debt theory, with the perspective that the outcome of debt crisis can be fundamentally seen as the struggle and cooperation between debtor and creditor, this thesis then carries out a full view analysis of the European Sovereign Debt Crisis. The distinctive nature of European Sovereign Debt Crisis will be analyzed in depth, and the internal connections between the debt crisis and the country in debt who has no currency solvency will be revealed, by carrying out these analyses, this thesis will illustrate the relationship between borrowing, production, trade and repayment of debt, hence seek out the fundamental solution for resolving debt crisis and provide valuable references for China to rationally use its foreign debt. A parallel analysis on different debt and financial crises over the years will be carried out in this thesis, the common and distinctive characteristics of these crises will be put together for discussion and the true nature of debt crises will be revealed, which will provide a significant guidance for us to fully understand debt crises and effectively adverse debt crises in the future.According to Karl Marx’s classical debt theory, the relationship between debtor and creditor is basically confrontation and cooperation between two parties. If the debt borrowed can be effectively used and result in higher production output, larger trade volume and better economy situation, then the repayment of debt is guaranteed, which will create a harmonies and bilateral beneficial cooperation circle between debtor and creditor. On the contrary, if the debt repayment is not guaranteed as result of ineffective use of debt, then the relationship between debtor and creditor will be pure confrontation, which will only end in the form of debt crisis. This theory is best illustrated by the Greek Debt Crisis, instead of rationally use foreign debt to achieve higher production output, larger trade volume and better economy situation, the Greek government use its foreign debt to finance its social welfare and higher level of income, which lead to its inability to repay its debt. As a result, the relationship between Greece and its creditors turns into confrontation, and the debt crisis break out. Meanwhile, Greek government’s creditors force Greek government to impose tight financial policies as a compulsory condition for providing bail out support, which also resulting the relationship between Greek government and its people, and the relationship between Greece and EU turn into confrontation.The cause of Euro Zone countries’ sovereign debt crisis can generally be summarized into two categories, one category is that, in order to maintain the stability of banking system and avoid recession, some government start to utilize state fund to bail out domestic banks, as a result, these governments become heavily in debt. The second category is that, weak economy condition and historical debt, force the current government to run on huge deficit, government’s inability to repay debts, inevitably lead to sovereign debt crisis. Within the Euro Zone, member country’s financial deficit cannot be lowered by issuing more currency from the central bank, instead, support from creditor countries are the only help they can get. However, support offered by European Commission, European Central Bank and International Monetary Fund can only temporarily ease the pain of debt crisis, far from being able to have the debt crisis full resolved for these countries.European Sovereign Debt Crisis has a deep-root cause that can be traced back to European Union’s System Defect, defects within the Euro Zone’s monetary system and political system, contribute to the outbreak of European Sovereign Debt Crisis. Euro, the common currency used by all Euro Zone countries, is a supranational currency issued by European Central Bank. Monetary unification was able to bring huge economic benefits to Euro Zone countries, however, it cannot satisfy each individual government’s need to regulate and adjust their own economy. When facing asymmetric shock, imposing financial policies is the only tool available for each individual government. There is a huge contradiction between each Euro Zone member’s individualized fiscal policy and the European Union’s Monetary unification policy. The design of Euro system magnified the limitation that Monetary unification can have on individualized fiscal policy of each member countries, it overlooked the much needed cooperation between these two elements. Furthermore, defects within the European Union governance structure, create a culture of lack of discipline among its members, moral risks become a major problem, the situation is even more worsened with the lack of policy making coordination and lack of financial supervision. As a result, after the outbreak of European Sovereign Debt Crisis, the respond was slow, support from European Central Bank was insufficient and the confrontation among European Union members become more serious than before.The European economic integration process has had some smooth ride in its customs union stage and common market stage, however, it is now facing a great challenge with monetary unification stage. This challenge is basically the confrontation between unification of economy and separation of national sovereignty. Therefore, the true nature of European Sovereign Debt Crisis is Political economy crisis. The Euro Zone system unified currency, central bank system and economy for its members, however, it cannot solve problems like unemployment and uneven distribution of income, which can only be dealt with by each individual government. However, with the Euro Zone system in place, each individual government had already lost their authority to issue currency. Losing monetary sovereignty means these governments lost their ability to use interest rate and exchange rate as means to regulate and adjust their countries’ macro economy. Instead, these governments can only rely on foreign debt and government deficit in order to tackle unemployment and increase income. Unification of economy and separation of national sovereignty is the core defect of Euro Zone System. The full and finale solution for resolving European Sovereign Debt Crisis can only be find with the political integration within the European Union.By comparing European Sovereign Debt Crisis to previous Debt Crisis, the distinctive nature of European Sovereign Debt Crisis is obvious. It is fair to say that all debt crisis are crisis of creditability, countries that have experienced crisis, such as Korea,Latin American countries, Thailand and Argentina are all Sovereign countries, they all have the authority to issue currency, and can use interest rate and exchange rate as means to adjust the balance of international payment, and defend their country from outside shocks. However, Euro Zone countries like Greece, by joining Euro Zone, they lost their authority to issue currency and unable to cope with crisis on their own by means to adjust the balance of international payment. The solution for their debt crisis can only be achieved by seeking support and cooperation from other Euro Zone members.By comparing the effect of foreign debt in China and in Greece, it is not hard to realize that, China have effectively utilized its foreign debt and result in higher production output, larger trade volume and better economic condition, the harmonies relationship between debtor and creditor was achieved. On the contrary, Greece was unable to utilized its foreign debt the way China did, and result in a serious confrontation between debtor and creditor. To sum up, how to effectively utilize foreign debt and adverse debt crisis, there are many important implications in the European Sovereign Debt Crisis for China to learn from.