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The recent sovereign debt crisis in the Euro zone: A matter of fundamentals?

Author

Listed:
  • Paulo R. Mota

    (University of Porto, School of Economics and Business, and NIFIP (Centre for Research in Public Finance and Monetary Policy of the School of Economics and Business), Porto, Portugal)

  • Abel L. Costa Fernandes

    (University of Porto, School of Economics and Business, and NIFIP (Centre for Research in Public Finance and Monetary Policy of the School of Economics and Business), Porto, Portugal)

  • Ana-Cristina Nicolescu

    (West University of Timisoara, Faculty of Economics and Business Administration, Timisoara, Romania)

Abstract

The idea that the Euro zone sovereign debt crisis was caused by structural weaknesses degenerating into fundamental macroeconomic imbalances in the peripheral countries prevails among international institutions such as the IMF, the ECB, and the European Commission. On the contrary, some economists believe that this crisis is the consequence of major deficiencies in the architecture of economic policy making in the Euro zone that did not allow a proper response to a global systemic crisis of the financial markets that started in the United States. The objective of this paper is to provide a better understanding of the public debt dynamics in the EU, differentiating the case of Euro zone peripheral countries. We used quarterly data from 2000 to 2011 to estimate a small-scale model that takes into account the interactions between key variables. Our results do not support entirely the official view. We conclude that the cause of the adverse debt dynamics unravelling after 2007 was a sharp GDP contraction, coupled with a substantial increase in the interest cost of debt finance due to higher self-fulfilling solvency risks perceived by creditors, interacting with a higher sensitiveness of Euro zone peripheral countries to fundamentals.

Suggested Citation

  • Paulo R. Mota & Abel L. Costa Fernandes & Ana-Cristina Nicolescu, 2015. "The recent sovereign debt crisis in the Euro zone: A matter of fundamentals?," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 65(1), pages 1-25, March.
  • Handle: RePEc:aka:aoecon:v:65:y:2015:i:1:p:1-25
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    Citations

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    Cited by:

    1. Florin-Cornel Popovici PhD student & Laura Nasta PhD student, 2015. "Use Of The European Union Financial Resources," Revista Tinerilor Economisti (The Young Economists Journal), University of Craiova, Faculty of Economics and Business Administration, vol. 1(25), pages 77-82, NOVEMBER.

    More about this item

    Keywords

    Euro zone; macroeconomic imbalances; sovereign debt crisis;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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