The Euro Area sovereign debt crisis: 2010 to 2012 and beyond

Abstract

This article carries out a detailed study of the Euro Area sovereign debt crisis since its inception in late 2009 until its most acute phase in the first semester of 2012. First the origin in Greece, Portugal, and Ireland is pinpointed, followed by a description of the contagion to Spain and Italy. The specific focus of the article is on the underlying macroeconomic imbalances and structural economic weaknesses that made these countries vulnerable. The paper highlights both the common and the country-specific features of the development of the crisis. Also, it examines the responses to the crisis implemented both by individual governments and at the European level by the European Central Bank and the European Commission/European Council. The Euro Area sovereign debt crisis constitutes a historic event of great relevance to fiscal policy and the associated public debt sustainability. The public finances of Greece and Portugal became vulnerable when their export dependent economies were hit by the global economic downturn of 2008–2009. In Ireland and Spain, the source of the public finance troubles were the construction and housing crashes which occurred in these two countries. Finally, in Italy the troubles originated in the initially high public debt burden, a pre-existing problem which worsened and became unsustainable in the context of the global economic downturn and already installed sovereign debt crisis.