The euro area sovereign debt crisis and the sovereign debt Laffer curve: a historic assessment for 1999–2014

Abstract

This article addresses the historical evolution of sovereign debt trajectories since the beginning of the euro area up to the corresponding sovereign debt crisis, using certain key economic concepts previously proposed by the literature in connection to other historic sovereign debt events. It first recovers the concept of the sovereign debt Laffer curve, which efficiently addresses the non-linear relationship between economic output and public debt issuance. It then presents an important set of theoretic economic concepts that accurately describe the onset of debt vulnerabilities negatively impacting economic growth, therefore linking these fundamental but heterogeneous public debt-related concepts under the unifying concept of the said sovereign debt Laffer curve, which adequately encompasses these heterogeneous concepts. For example, fundamental concepts such as debt vulnerability, ‘debt overhang’, or ‘illiquidity vs. insolvency’ are adequately contextualized under the said Laffer curve. This innovative historical perspective might be useful in the analysis of subsequent sovereign debt crises, as well as in tackling future research in public debt sustainability, namely where the design and implementation of sustainable public debt policies in advanced economies is concerned.