Debt crisis in the Euro area: Have we found the way out?
Abstract: Looking at the evolution of business cycles in countries belonging to the euro area, we can easily conclude that the criteria laid by the Optimum Currency Area theory were not entirely fulfilled by its members; this can be seen mainly after 2003-2004, when we start observing diverging trends across euro area members in terms of growth rates, inflation rates, current account balances, labor costs as well as fiscal policies of course; nevertheless, with the outbreak of the financial and economic crisis, important reforms in the European governance were made, and tools needed to supervise the European banking and financial system were created in order to tackle the crisis and lessen its impact on the Member states. Moreover the surveillance of budgetary positions has been reinforced, in an effort to deal with the sovereign debt crisis, and a new Treaty has been signed. But the following questions remain: will these measures be sufficient to safeguard the single currency? Will the reforms enable the euro zone to move closer to an optimum currency area in the future? Furthermore, has the crisis led to a decrease in external imbalances that exist among euro zone countries, and has it led to a reform of the labor market in some countries? Have we finally found the way out? Scenarios of future developments of the sovereign debt crisis are discussed, and further proposals of reforms are made for a brighter outlook of the euro area.
Key words: euro area, optimum currency area, financial and economic crisis, sovereign debt, F33