The EU Debt Crisis: Testing and Revisiting Conventional Legal Doctrine

26 Pages Posted: 15 Apr 2016

See all articles by Paul De Grauwe

Paul De Grauwe

London School of Economics & Political Science (LSE); CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Centre for Economic Policy Research (CEPR)

Yuemei Ji

University College London - School of Slavonic and East European Studies

Armin Steinbach

Oxford University - Nuffield College; German Federal Ministry of Economic Affairs; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: April 12, 2016

Abstract

Controversies surrounding the European sovereign debt crisis loom prominent in the public debate. From a legal perspective, the no-bailout rule and the ban on monetary financing constitute the main principles governing the legality review of financial assistance and liquidity measures. Interpretation of these rules are full of empirical claims. According to conventional legal doctrine, bond spreads only depend on the country’s debt position, largely ignoring other causal factors including liquidity. We test the hypotheses implicit in conventional legal reasoning. We find evidence that a significant part of the surge in the spreads of the peripheral Eurozone countries was disconnected from underlying fundamentals and particularly from a country’s debt position, and was associated rather strongly with market sentiments and liquidity concerns. We apply our empirical findings to the legal principles as interpreted by recent jurisprudence arguing that application of the no- bailout principle and the ban on monetary financing should be extended to capture non-debt related factors. Also, the empirical results suggest taking recourse to alternative legal grounds for reviewing the legality of anti-crisis instruments and allowing for a lender of last resort in the euro zone.

JEL Classification: Z00

Suggested Citation

De Grauwe, Paul and Ji, Yuemei and Steinbach, Armin, The EU Debt Crisis: Testing and Revisiting Conventional Legal Doctrine (April 12, 2016). LEQS Paper No. 108. Available at SSRN: https://ssrn.com/abstract=2763819 or http://dx.doi.org/10.2139/ssrn.2763819

Paul De Grauwe (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yuemei Ji

University College London - School of Slavonic and East European Studies ( email )

Malet Street
London WC1E 7HU
United Kingdom

Armin Steinbach

Oxford University - Nuffield College ( email )

New Road
Oxford, OX1 1NF
United Kingdom

German Federal Ministry of Economic Affairs ( email )

Scharnhorststrasse 34-37
Berlin, 10115
Germany

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt Schumacher Str 10
Bonn, 53113
Germany

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