Sovereign Debt Crisis And Currency Crisis

The global economic crisis in 2008 leds to the serious European sovereign debt crisis. The situation of Greece, Spain, Portugal, Italy and Ireland which are in EU and euro area is particularly bad. The traditional theory is that the currency crisis is often an important incentive of sovereign debt crisis. This is because a country's currency devaluation will increase the total amount of debt denominated in foreign currencies. However, on one hand, previous sovereign debt crises happened in emerging market countries or in developed countries, and a large number of theoretical and empirical studies are targeted at those countries. This sovereign debt crises occurs in the quite developed EU and the euro zone, which can not help but cause us to rethink those previous studies; on the other hand, because the euro is the single currency of the regional organization,the crisis is different from those which happened in single countries. The currency crisis of euro includes not only the representation of substantial depreciation of the euro, but also the possibility of it's existence. In this paper, we make a sample of Germany, Belgium, the Netherlands, Greece, Spain, Portugal, Italy and Ireland which are members in the EU and the euro area for study. First of all, we try to describe the situation of intra-EU trade imbalance and explain the reasons of that. Then we get the point that the euro is one of the important reasons to promote intra-EU trade imbalance (one of the two euro dilemmas). While another dilemma is that the Member States in the euro excessivly rely on fiscal policies due to the lack of diversification of policy tools. The two plights of the euro is not just the major causes of the euro currency crisis, but also the important reasons of the European sovereign debt crisis. And the European sovereign debt crisis is a manifestation of the euro currency crisis. Here we try to explain the reasons of the European sovereign debt crisis by three aspects in an open economic model of AS-AD:first,when the economic crisis happens, the automatic market adjustment mechanism of the five countries ( Greece, Spain, Portugal, Italy and Ireland ) is poor to the other countries ( Germany, Belgium and Netherlands ); second, the eight countries are facing the same dilema that they are all lack of a wide range of policy adjustment tool; third, adverse trading conditions within the EU makes Greece, Spain, Portugal, Italy and Ireland have no sufficient trade surplus to finance the large fiscal expenditures, which increased the new debt pressure after the economic crisis ( The sonclusion is still valid when considering the situation in global trade) . In the last part of this paper, we make the European sovereign debt crisis and the currency crisis of the euro as an example, and issue three points that the EU regional economic and monetary integration process brights to us: first, the member states which participate in regional economic and monetary integration should have a similar economic base; second, regional economic and monetary integration organizations should pay attention to the role of fiscal policy, which we should not only make it to play it's independent effect, but also consider to maintain the harmonious development among member states; third, the member states which are disadvantaged in the internal trade should actively participate in the core industries of regional economic by the division of labor and competition.