Sovereign Insolvency in the Euro Zone Public and Private Law Remedies

Abstract

In the wake of the global financial crisis, the economically weaker countries of the European Union that adopted the euro as a common currency soon started to feel the pressure of markets. In a monetary union, with one single central bank in charge of the monetary policy but without a common fiscal policy, or even an adequately coordinated one, those countries with oversized government structure and/or an internal balance of payments deficit became rapidly affected by the lack of confidence that was rapidly spreading in the global financial markets. It started with Greece, moved to Ireland and Portugal and the risk of full contagion to Italy and Spain, the euro zone's 4th and 5th largest economies, posed a real threat to the existence of the euro itself. In light of this, the EU has realized the need to react. Some new measures have been adopted and more – the majority – have been announced but are not even underway yet. This article concentrates on the measures that relate directly to the risk of insolvency of a member state; to its prevention, control and avoidance (ex ante mechanisms), and to the instruments foreseen for its solution (ex post mechanisms, with particular regard to the new European system of collective action clauses). It is here suggested that the measures aimed at strengthening the controls, increasing transparency and beefing up the powers of the European institutions create a robust framework capable of avoiding future crises. Conversely, it is argued that the reactive mechanisms envisaged in the new framework might not be so adequate. Europe might have erred by prioritizing “public law” solutions over “private law” mechanisms, since this type of approach could lead to unfair and inefficient results. Although the European collective action clauses will not help to solve the current crisis, they could place euro zone countries in a better position to tackle future sovereign crises. However, the current design of collective action clauses could be improved and uncertainties remain as to their implementation. It is here concluded that there has not been a better time than this one to opt for a comprehensive solution to sovereign insolvency in the euro zone, a solution that involves public and private creditors in an organized, full sovereign debt restructuring mechanism.