Council on Foreign Relations
October 6, 2011
European policymakers moved to shore up (NYT) the continent's financial sector in a new effort to limit sovereign debt contagion. The action came a day after it became clear a bailout would be needed for French-Belgian bank Dexia (Bloomberg), which passed a stress test in July, but remains heavily exposed to Greek debt. Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics, says the so-called eurozone sovereign debt crisis is actually comprised of multiple crises, which have hampered the ability of EU officials to act decisively. Kirkegaard says policy inaction combined with a general crisis of confidence in the eurozone is contributing to volatility in global financial markets. It is a "big step forward" that eurozone leaders are finally acknowledging the need to recapitalize their banking systems. "That is something that is absolutely necessary for this crisis to be contained," Kirkegaard argues.
Why is the eurozone sovereign debt crisis fueling such extreme global market volatility?
The fundamental issue is that we call it the "European sovereign debt crisis," but the reality is that it's actually multiple crises. It's a competitiveness crisis in some euro-area countries, it's a fiscal crisis, it's a banking crisis, and then it is also insufficient institutionalization of the euro. You actually have three or four different crises at the same time, which is why we are seeing the inability of the European authorities to act. It's really that inability combined with the generalized crisis of confidence in Europe that is creating this incredible volatility that we are seeing in the global markets. It also has to do with the fact that the U.S. economy is very weak, for reasons that are mostly domestic.
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