Treichel, VolkerLin, Justin Yifu2012-12-212012-12-212012-07https://hdl.handle.net/10986/12017The simmering sovereign debt crisis in the Euro Zone represents a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. The purpose of this paper is to analyze the root causes of the crisis in Europe and assess the extent to which it was driven by the global financial crisis and by factors internal to Europe, notably the adoption of the common currency. Adoption of the euro led to convergence of interest rates in periphery countries to the levels in core countries and, in combination with rising capital inflows owing to greater financial integration, set off a consumption and real estate boom in periphery countries, leading to higher growth and increases in government revenue and spending. The resulting real appreciation led to a loss of competitiveness in periphery countries, adversely affecting export performance and causing rising current account imbalances. While the fiscal position remained manageable before the crisis owing to rising revenue, the recession brought about by the global financial crisis led to the burst of real estate bubbles and a financial sector crisis and to sharply increased budget deficits and worsened debt indicators and triggered the sovereign debt crisis. Core countries, in particular Germany, maintained a competitive edge through wage restraint allowing them to increase exports to periphery countries, while their banks profited from increased lending to non-core countries. In sum, the euro exacerbated intra-European imbalances whose unsustainability became evident in the aftermath of the global financial crisis and triggered the current sovereign debt crisis.en-USCC BY 3.0 IGOACCOUNTINGADVERSE SHOCKSAGGREGATE DEMANDAMOUNT OF CREDITANNUAL GROWTHASSET CLASSESASSET PRICESBAILOUTBALANCE OF PAYMENTSBALANCE OF PAYMENTS CRISISBALANCE SHEETBALANCE SHEETSBANK BORROWINGBANK DEPOSITSBANK FOR INTERNATIONAL SETTLEMENTSBANK HOLDINGSBANK LENDINGBANK LIQUIDITYBANK POLICYBANKING CRISISBANKING SECTORBANKING SYSTEMBANKING SYSTEMSBASIS POINTSBILATERAL TRADEBILLSBONDBONDSBORROWING COSTSBUDGET DEFICITBUDGET DEFICITSBUSINESS CYCLECAPITAL ACCOUNTCAPITAL ACCOUNT LIBERALIZATIONCAPITAL ACCOUNT TRANSACTIONSCAPITAL CONTROLSCAPITAL FLOWSCAPITAL INFLOWSCAPITAL REQUIREMENTSCENTRAL BANKCOMMERCIAL BANKCOMMERCIAL BANK LOANSCOMMERCIAL BANKSCOMMON CURRENCYCOMPETITIVE EDGECONSOLIDATIONCORE INFLATIONCREDIBILITYCREDIT BOOMCREDIT BOOMSCREDIT DERIVATIVESCREDIT EXPANSIONCREDIT EXPOSURECREDIT QUALITYCREDIT WORTHINESSCURRENCYCURRENCY RISKCURRENCY UNIONCURRENCY UNIONSCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT DEFICITCURRENT ACCOUNT DEFICITSCURRENT ACCOUNT IMBALANCESCURRENT ACCOUNT POSITIONSCURRENT ACCOUNT SURPLUSDEBT BURDENDEBT CRISISDEBT SUSTAINABILITYDEBTSDEFAULTSDEPOSITDEPOSIT MONEY BANKSDERIVATIVESDISPOSABLE INCOMEDOMESTIC CONSUMPTIONDOMESTIC DEMANDDUTCH DISEASEEARNING ASSETSECONOMIC CONTRACTIONECONOMIC CRISISECONOMIC GROWTHECONOMIC POLICYEMERGING MARKETSEQUITY MARKETEURO ZONEEUROPEAN CENTRAL BANKEXCHANGE RATEEXCHANGE RATE FLUCTUATIONSEXCHANGE RATE RISKEXPENDITURE INCREASESEXPORT COMPETITIVENESSEXPORT GROWTHEXPORT MARKETEXPORT PERFORMANCEEXPORTEREXPOSURESEXTERNAL BALANCESEXTERNAL COMPETITIVENESSEXTERNAL DEBTEXTERNAL INDEBTEDNESSEXTERNAL POSITIONFINANCESFINANCIAL CONTAGIONFINANCIAL CRISISFINANCIAL DEEPENINGFINANCIAL FLOWSFINANCIAL INSTABILITYFINANCIAL INSTITUTIONSFINANCIAL INSTRUMENTSFINANCIAL INTEGRATIONFINANCIAL LIBERALIZATIONFINANCIAL MARKETFINANCIAL MARKETSFINANCIAL OPENNESSFINANCIAL SERVICESFINANCIAL STABILITYFINANCIAL STUDIESFINANCIAL SYSTEMFISCAL BALANCESFISCAL DEFICITFISCAL DEFICITSFISCAL DISCIPLINEFISCAL POLICIESFISCAL POLICYFISCAL POSITIONFOREIGN ASSETSFOREIGN BANKFULL LIBERALIZATIONGOVERNMENT DEBTGOVERNMENT DEFICITGOVERNMENT DEFICITSGOVERNMENT EXPENDITUREGOVERNMENT REVENUEGOVERNMENT SPENDINGGROWTH PERFORMANCEGROWTH RATEGROWTH RATESHOLDINGHOUSINGHOUSING PRICESINDEBTED COUNTRIESINDEBTEDNESSINFLATIONINFLATION RATESINTEREST RATEINTEREST RATESINTERNATIONAL BANKINTERNATIONAL CAPITALINTERNATIONAL CAPITAL MARKETSINTERNATIONAL ECONOMICSINTERNATIONAL INVESTMENTINTERNATIONAL SETTLEMENTSINTERNATIONAL TRADEJUDICIAL INDEPENDENCELENDERLEVERAGELEVYLIQUIDITYLIQUIDITY RISKSLOANLONG-TERM BOND YIELDSLOSS OF COMPETITIVENESSMARKET SHAREMARKET SHARESMARKETABLE SECURITIESMONETARY FUNDMONETARY POLICYMONETARY UNIONMORTGAGEMORTGAGE LOANSMORTGAGE MARKETMORTGAGE MARKETSNATIONAL CURRENCIESNON PERFORMING LOANSNONPERFORMING LOANSOPTIMUM CURRENCY AREASPOLITICAL ECONOMYPOOR ASSET QUALITYPORTFOLIOPRICE INCREASESPRIVATE CONSUMPTIONPRIVATE CREDITPRIVATE INVESTMENTPRIVATE SECTOR BANKSPROFITABILITYPROPERTY INVESTMENTPUBLIC DEBTRATE OF RETURNREAL APPRECIATIONREAL EFFECTIVE EXCHANGE RATERECESSIONREGULATORY AUTHORITIESRISK AVERSIONRISK MANAGEMENTRISK MANAGEMENT TOOLSRISK PROFILERISK TRANSFERSHARE OF ASSETSSHORT-TERM DEBTSINGLE CURRENCYSOLVENCYSOVEREIGN DEBTSTAMP DUTIESSTANDARD DEVIATIONSTOCK MARKETSTRUCTURAL REFORMSSUPERVISION OF BANKSUPPLY OF CREDITSURPLUSESTAXTAX INCREASESTRADE SURPLUSTRADE UNIONSWAGESWEALTH EFFECTWORLD ECONOMYWorld Bank10.1596/1813-9450-6127