Sovereign debt crisis! What crisis?

EUROPE

Talk among market participants and other pundits about a sovereign debt crisis has intensified over the last two years on the back of the systemic crisis in the eurozone.

The perception that public finances are in dire straits is widely used to justify the fiscal austerity agenda that is currently pursued in Europe and the US. Often it is argued that fiscal austerity now is needed to prevent new systemic crises in the future. The latter is built on the premise that rising sovereign debt levels are at the origin of the current euro crisis. Despite an undisputed need to ensure long-term sustainability of public finances, a correct diagnosis of the crisis suggests this explanation is too short-sighted. In support, one only has to look at a current assessm...