European Sovereign Debt Crisis Analysis

The theory of Optimum Currency Area has always been the research focus of international finance and world economy since it was proposed by Mundell in1961. Moreover, regional monetary cooperation—which was developed from Optimum Currency Area Theory—is one of the most important areas in globalization. In1999, euro area was set up. And it means that regional monetary cooperation has finally come into practice.In2009, the sovereign debt crisis was broke out in Greece and kept going worse. Since then, more and more countries in euro area have been influenced by the crisis. Under such a circumstance, this paper firstly chooses some standards of optimum currency area, finds suitable economic indicators for each standard, and then makes theoretical analysis of European monetary cooperation’s economic foundation. Specifically, those standards are the mobility of the factors of production, the openness of economy, the integration of financial market, the similarity of inflation, the elasticity of salary and the integration of policies. After the analysis, the results are as follows:First, the euro area has almost satisfied the standards of opening economy and similar inflation. And the satisfaction is helpful for European monetary cooperation. Second, euro area has a high fluency of capital. However, the fluency of labor and the elasticity of salary still need to be improved. The above two standards has not ran very well since euro area was set up, and this has made negative effects to European monetary cooperation to some extent. Third, although euro area has a high integration in financial policies, fiscal policies varies from country to country. As a result, euro area still has a long way to go in satisfying the standard of fiscal policies integration. Moreover, the lack of policies integration has greatly affected the efficiency of European monetary cooperation.After that, this paper makes empirical analysis of the first twelve euro countries’ economic foundation for monetary cooperation. In detail, this paper chooses the standard of the symmetry of economic shocks, uses VAR and finally gets the economic impulse correlations among euro countries and the two most important euro countries—Germany and France. The result shows that Finland and the PⅡGS (Portugal, Ireland, Italy, Greece and Spain) have weak correlations with Germany and France. For the other countries in euro area, although the correlations are good, they still need to be improved. Therefore, euro area does not run very well in the economic foundation of the symmetry of economic shocks. However, the support correlations between Germany and other euro countries are stronger than the demand correlations. Because support impulse is more stable and sustainable to outcome, it provides some good news for the circumstance which is not good.Then this paper discusses the fundamental reason for the crisis on the research basis of the weak economic foundation of European monetary cooperation, and thinks that the asymmetry of euro countries’ economic shocks is the root reason for the crisis. Moreover, the way to deal with the problem and therefore solves the crisis completely is improving economic integration of euro area. As it comes to the specific measures, the PⅡGS countries can improve the quality of their human resources. What’s more, fiscal correlation should come along with financial support. Specifically, the European fiscal department should be set up beside European Central Bank and therefore allocates euro countries’ fiscal revenue and expenditure in order to deepen European integration.At last, this paper gives some advices for East Asian monetary cooperation. In detail, this paper thinks that East Asian countries should not only get the same economic indicators, but also try their best to achieve economic integration. Only in this way can make every country of the area benefit from this monetary cooperation.