Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 22 Issue 2

Lessons Learned from European Sovereign Debt Crisis Afzal Ahmad Abstract- The sovereign debt crisis has severely affected countries within the Eurozone. The widespread consequences of the crisis include economic recession and financial markets downturn. The following essay provides a detailed overview of the debt crisis and its major impacts on financial markets and institutions, and presents lessons learned following the crisis. The results presented by this essay comprise the strong interconnection within the Eurozone and the lack of efficient regulations. I. I ntroduction sovereign default is defined as the failure of a government to meet payments on its debt obligations to domestic and external creditors (Nelson, 2013). The default risk of several European countries increased excessively after the 2007/2008 financial crisis, when indebted nations extended their borrowings to recover from recession. Consequently, by 2010 they were facing severe budget deficits. The European sovereign debt crisis evolved into the biggest challenge of the Eurozone as it threatened the stability of the Economic and Monetary Union, financial markets and banking systems. The purpose of this essay is to provide an in- depth analysis of the causes and effects of the European sovereign debt crisis as well as the measures taken to respond to the crisis. The essay is organised in six parts. It will first explain the main causes of the crisis. Secondly, it will present the consequences on financial markets and institutions. Thirdly, the effectiveness of the measures implemented to solve the crisis will be evaluated. Finally, the essay discusses the aftermaths of the crisis, including its effects on the financial landscape, the new trends emerging, and the lessons to be learned. II. M ain C auses of the E uropean S overeign D ebt C risis The European debt crisis was triggered in 2009 by negative macroeconomic and financial shocks involving governments, banks, and inefficient regulations. Firstly, it is essential to recount the Eurozone’s establishment to understand the debt crisis. The European Economic and Monetary Union (EMU) is an agreement between the European Union’s member Author: Associate Professor of Accounting, Department of Business Administration, International Islamic University Chittagong. e-mail: afzaliiuc@gmail.com states, to establish a common monetary policy and a single currency, the euro (Eurozone Portal, 2014). The EMU is described in the Maastricht Treaty of 1992, and purposed to facilitate capital and commercial flows and enhance economic growth. To be part of the Eurozone, the member states have to meet strict requirements in terms of price stability, public finance, interest rates and currency exchange rates. As an integral part of the EMU, the European Central Bank was established in 1998 to regulate the monetary policy in the Eurozone. In January 1st 1999, the euro was officially instituted as the common currency of eleven members of the EU. As of today, the Eurozone consists of eighteen countries (Eurozone Portal, 2014). Even though the Stability and Growth Pact (SGP) was established in 1997 to control EMU members’ budget balances (limiting budget deficit at 3 % of GDP and total debt at 60 % of GDP), a fiscal union and a banking union were missing in the euro area. When they joined the Eurozone, governments were now able to access credit markets easily and benefit from low interest rates without being monitored (Lane, 2012, pp. 49-67). Portugal, Ireland, Italy, Greece, and Spain, commonly referred to as the PIIGS, are at the centre of the sovereign debt crisis. Indeed, the favourable access to capital markets resulted in excessive borrowing and government spending by the PIIGS. Figure 1 emphasises the fact that the PIIGS’ budget deficit was higher than the 3% allowed by SGP when they joined the Eurozone. A 55 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals