A scenario analysis of potential mutualisation mechanisms for peripheral European countries

Based on the optimum currency area theory the ESM and ‘Six-Pack’ responses to the sovereign debt crisis were deemed to be insufficient, therefore a more appropriate response is necessary, that being debt mutualisation. This research paper explores a quantitative scenario analysis of potential mutualisation mechanisms for peripheral European countries which could be employed in response to the sovereign debt crisis as part of creating an optimum currency area. The scenario analysis was conducted by analysing the effect mutualisation of peripheral countries’ debts have on the core countries contribution levels to the ESM fund, the impact a 30% increase of the ESM fund would have on key government finances, and an examination of the effect specific mutualisation percentages’ of Greece’s debt have on the peripheral countries. Furthermore, Spain was used for a comparison of Greek scenarios. The research utilised secondary data from a cross-sectional internet based data set published on the statistical office of the European Union and a European Institution ESM. Potential mutualisation mechanisms were analysed for peripheral European countries by examining data which included national debt levels and ESM contribution fund figures of 2014. The results of this scenario analysis demonstrate that the core country contribution levels have increased as a result of the mutualisation of peripheral country national debts. Additionally, 12% could be mutualised of all the peripheral countries’ national debts however, the more Greece’s national debt is mutualised, the less these peripheral countries’ national debts can be mutualised under the €500 billion cap. Furthermore, under the increased €650 billion cap the peripheral countries’ national debts can be mutualised by a higher percentage. This research paper concludes that while debt mutualisation corresponds with optimum currency theory, it could lead to inefficiency in the Eurozone as the cost of excessive borrowing would be endured by other countries. Therefore fiscal federalism could be another potential response to the sovereign debt crisis