Research On The Southern European Sovereign Debt Crisis

Since2010, the sovereign debt crisis in Europe and America has put on one drama after another. The debt crisis in southern European countries, represented by the PUGS (Portugal, Italy, Ireland, Greece and Spain), has destabilized the financial system and dragged the European economy into prolonged recession. Meanwhile, the long-standing deficit policy of the U.S. has led to successive breaches of debt ceiling, and the debt sustainability of the U.S., the biggest borrower in the world, is a great source of concern. On the other hand, the local government debt in China has surged since2010, and the latent risks are significantly on the rise, which is fundamentally attributable to the inherent deficiencies of the current fiscal and tax regime and practically due to the economic stimulus measures taken by fiscal expansion in the wake of the global financial crisis in2008. Despite the overall soundness of China’s fiscal position in terms of the aggregate debt level, ratio and structure, the local government debt in China is still fraught with many potential risks, which, if not controlled timely and regulated properly, will pose significant challenges to the Chinese economy. This dissertation analyzes the evolution, historical comparison, internal and external causes as well as bailout of the sovereign debt crisis in southern Europe, so as to offer viable policy suggestions for public debt management in China.The global financial crisis that broke out in the U.S. and engulfed the world is the fuse and the flash point of the European sovereign debt crisis. From the perspective of the "financial accelerator" concept proposed by Ben Bernanke, this dissertation first demarcates the similarities and differences between the sub-prime mortgage crisis in the U.S. and the sovereign debt crisis in Europe, and comprehensively reviews the burst, evolution and impact of the European sovereign debt crisis. History is a mirror, which presents us with an approach to gaining a deeper and broader insight into the debt crisis. Therefore, this dissertation subsequently draws comparison of the severe sovereign debt crisis between emerging and developed economies in the past decades, and presents a framework for comparative analysis. The internal and external causes, the prospect of the debt crisis and the possible fate of the euro zone are the key focus of this dissertation. The direct cause of the sovereign debt crisis is the imbalance of public finance, which is manifested by excessive fiscal spending over revenue. The southern European countries spend beyond their means on welfare. The hollowing-out of the real economy and the imbalance of industrial structure make the economic growth engine sputter. The economic and institutional deficiencies of southern European countries are the root causes behind the imbalance of public finance and sovereign debt crisis. Apart from the internal reasons of the southern European countries, the founding of the euro zone ushered in a new era, but soon after the initial "honey moon" period of rapid growth, the innate problems stemming from the fact that euro zone has a single currency but no single finance ministry started to emerge. The monetary union amplified the fiscal imbalance of southern European countries and the loss of monetary sovereignty forced them to address the imbalances by abusing fiscal policies, which ultimately triggered the debt crisis.When expounding the inherent deficiencies of southern Europe, the dissertation specifically makes profound comparative analysis on the economic system and welfare policy of the southern European and Nordic countries from the perspective of fiscal deficit, taxation and public debt. It also gives a second thought on the Recardian Equivalence Theorem. The main purpose is to explore answers to the questions that why the sovereign debt crisis hit the southern European countries, not the Nordic ones, since they all adopt a broad welfare policy framework, and whether a high welfare system is the root cause of the debt crisis. Since the sovereign debt crisis broke out in southern Europe, there has been much debate on the demise of euro, the collapse of the euro zone and even the disintegration of the European Union. Where the euro zone, an idealist experiment born with "inherent deficiencies", might go and how the drama of sovereign debt crisis might draw the curtain in the end will not only determine the destiny of euro, but also offer lessons for the future attempt of regional and monetary integration elsewhere. This dissertation conducts in-depth research on the long-term effectiveness of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), the possibility of building a fiscal union, the real effects of fiscal austerity and the policy considerations of the European Central Bank (ECB). On the base of the above-mentioned analysis, the author presents several scenarios on the future of the southern European debt crisis and the destiny of the euro zone.There are growing potential risks with respect to the local government debt in China, and the outlook of the situation is not optimistic. Once the rapture of capital chain occurred in the local government debt, systemic risks would possibly be ignited. The sovereign debt crisis in southern European countries thus provides us with a sobering lesson: a package plan on areas such as industrial restructuring, welfare-friendly economic growth, debt management and financial sector reform must be designed to ward off potential financial, fiscal or even sovereign credit risks.