030 Borrowing, Lending and Regulating: The Origins and Evolution of the European Sovereign Debt Crisis

Tuesday, June 25, 2013: 11:00 AM-12:45 PM
A0.08 (Oudemanhuispoort)
The papers of this panel deal with three important aspect of the European sovereign debt crisis. First, Hancké and Johnston challenge the notion that excessive fiscal spending has been the primary cause of the current European sovereign debt crisis. Though this hypothesis explains why markets doubt Greece's and Italy's capacity to repay its debts, measured in terms of their high interest rates on long-term government bonds, it fails to carry to other EMU cases, namely Spain and Ireland. They argue that a country's capacity to limit public sector wage growth, relative to wage growth in the manufacturing sector, better accounts for systemic differences towards EMU countries' exposure to market speculation. Nations that were effective in limiting public sector wage growth in EMU's early years witnessed enhancements in national competitiveness and positive current account balances, while those that were unsuccessful experienced competitive/current-account decline.

Second, Goyer and Valdivielso del Real link the relative absence of takeovers in French and German banking to the depth of the sovereign debt crisis. They argue that the position of the French and German governments was shaped in great part by the size of their banking sector which itself reflected the absence of an active market for corporate control in the two countries. The relative marginalization of takeovers meant that an important mechanism of corporate restructuring was absent which, in turn, has magnified in importance the negative consequences associated with potential financial losses of French and German banks as well as exerted a preponderant influence on the responses of their governments to the sovereign debt crisis.

Third, Mabbett and Schelkle argue that the current focus on the EU Commission on control and sanctions as keys to macroeconomic stability is ill placed in the current context. In paying heightened attention to fiscal indicators following a banking crisis, the EU resembles the drunk who looks for his lost keys under the lamp-post, not because he can be sure that they are there but because ‘that’s where the light is’. They argue that the EU return to a disciplinarian approach can be explained by the stark emergence of asymmetry between borrowing and lending nations, not by the original ‘free-riding’ or ‘moral hazard’ rationales for control that may even be counterproductive in the context of the financial crisis. They contrast this explanation with two others: an institutional interpretation that highlights that the focus is on fiscal surveillance because this is the main existing mode of economic governance in the EU; a credibility explanation where a tighter fiscal control is seen as necessary to reassure markets; in other words the driver of the surveillance regime is the market ‘audience’.

Pepper Culpepper
Pepper Culpepper
European Sovereign Debt Crisis: A Consequence of Fiscal Irresponsibility or Sectoral Labour Market Imbalances?
Robert Hancke, London School of Economics and Political Science; Alison Johnston, Oregon State University; Suman Pant, Oregon State University
Restrained Markets for Corporate Control in French and German Banking and the Depth of the Sovereign Debt Crisis
Michel Goyer, Warwick Business School; Rocio Valdivielso, University of Warwick
Searching under the Lamp Post: The Evolution of Fiscal Surveillance
Deborah Mabbett, Birkbeck College; Waltraud Schelkle, London School of Economics
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