Abstract
Since the wide spreading of the European Union (EU) crisis begun, the research papers have been providing different definitions such as currency crisis, competitiveness crisis, banking crisis, balance of payment crisis, but the most frequent notion of EU crises is the sovereign debt crisis. In this paper, the researchers agree that the current European crisis can be identified as sovereign debt crises at its surface, but in order to search for solutions of EU problems, we must look deeper into the sources of this crisis. Through this paper, the multiplication of crisis is explained, whereby it is being concluded that one type of crisis led to another, while staying on the point that the Eurozone current crisis is basically a combination of two core crisis: balance of payment crisis and banking crisis. In order to support the hypothesis that sovereign debt crisis is deeply connected with balance of payment crisis, we have analysed the trade and capital flows of European countries. It was discovered that periphery countries mostly financed their current account deficit, trade deficits and public deficit through external borrowing from creditor countries. Further, the periphery countries have been cumulating not only trade deficit in trade activity with other European partners, but also in trade with the rest of the world. The key source of imbalances between the European countries seems to be a different level of competitiveness caused by different level of productivity. As the second face of EU crises, we recognised a banking crisis. We found that sovereign debt crisis and banking crisis are interconnected but banking crisis usually precedes the debt crisis. With the fast growth of international capital flows, financial integration was strongly regionally concentrated and became especially important within the EU. Through the analysis of the international investment position of creditor countries, it was concluded that these countries are more integrated within the euro area through financial flows than through real economic flows. Additionally, it was discovered that creditor countries’ banks were among the biggest investors in bonds of periphery countries such as Greece. In other periphery countries such as Ireland, banking crisis and subsequent measures for the rescuing of banking system led to the increase of public debt. In the other countries, banks were faced with solvency problems due to bad debt holdings. Having in mind that we found interconnection of the debt crisis with balance of payment crisis on the one side, and with the banking crisis on the other side, the conclusion is that sovereign debt crisis in the Eurozone is a result of two-core crisis: balance of payment crisis and bank crisis. Reckoning on the European Union history where each crisis usually led to the stronger integration, maybe the current crisis is a step further towards better and deeper integration.
Pigs or Lambs? The European Sovereign Debt Crisis and the Role of Rating Agencies
