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The Sovereign Debt Crisis in Europe, Save Banks Not States

17 Pages Posted: 1 May 2012  

Hans-Bernd Schäfer

Bucerius Law School; University of Hamburg

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2012


The European central bank is a bank of banks but not a bank of states. This reduces the capabilities of member states to finance deficits. The role of the central bank to cope with the debt crises is institutionally more limited than in most other Western countries. The European Stability Mechanism has not enough financial power to bail out all distressed countries in the Eurozone. Eurobonds could increase lending capacities but would require a change of the European treaty, which is not in sight. They violate the no bail out clause of Art.125 of the Treaty on the Functioning of the European Union. The policy option is therefore debt restructuring of distressed countries and a bailout of financial institutions to avoid conflagration. This option would also shift some of the burden to creditors outside the Eurozone rather than to shift all risk on the people in solvent countries within the Eurozone.

Keywords: Euro, European debt crisis, European Central Bank, European stability mechanism, debt restructuring, sovereign insolvency, no bail out clause, Eurobonds

Suggested Citation

Schäfer, Hans-Bernd, The Sovereign Debt Crisis in Europe, Save Banks Not States (May 1, 2012). Available at SSRN: or

Hans-Bernd Schaefer (Contact Author)

Bucerius Law School ( email )

Jungiusstr. 6
Hamburg, 20355

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146

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