Risk of a Financial Crisis Response Essay

Risk of a Financial Crisis Response Essay

Make a comment about the article below1 to explain why you agree this opinion.

around 100 words

How should the EU respond when a country threatens to default on its sovereign debt?

When countries default on their sovereign debt, they increase the risk of a financial crisis. A crisis similar to the 2008 financial crisis, which crippled so many industries, would follow. Again, think of the role banks play in the matters of sovereign debt. Since banks are central to holding the sovereign debt, it can only be expected that significantly huge losses would accrue. These losses would trigger other effects such as rising Libor rates (Paulus, 2013).

The EU’s response in cases where countries threaten to default should be focused on preventing a financial crisis which could even be a threat to the survival of the EU itself. Enforcing the application of the permanent bailout fund would be a good means in assuring member countries and lenders that the EU is keen on standing behind its members. When threats of default come, the EU needs to act fast, now that member countries have the right to grant budgetary power to centralized EU control (Kilpatrick, 2018). In some cases, the EU may use bailouts.

Should the EU be concerned when a country leaves the EU because of the ‘default’?

A country could mitigate the threat of a sovereign default by issuing currency, but EU members lose the right to issue currency because of the common monetary policy. Even with financial aid from the EU, the crisis in Greek has not fundamentally solved. Thus, when a country leaves the EU due to the ‘default’, other EU members may be disappointed by the EU’s response and worry about the shortcomings of the regional monetary policy. In the face of finical crises, it could lead to the collapse of the EU.

Kilpatrick, C. (2018). Abnormal Sources and Institutional Actions in the EU Sovereign Debt Crisis—ECB Crisis Management and Sovereign Debt Loans. Oxford Scholarship Online. Retrieved from https://www.oxfordscholarship.com/view/10.1093/oso/9780198817468.001.0001/oso-9780198817468-chapter-4

Paulus, C. G. (2013). A Resolvency Proceeding for Defaulting Sovereigns. Collective Action Clauses and the Restructuring of Sovereign Debt. Retrieved from https://www.degruyter.com/view/books/9783110314526/

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