Table of Contents1. Introduction (1)2. The causes of the European Sovereign Debt Crisis (ESDC) (2)2.1 The major features of the ESDC (2)2.2 Causes of the ESDC (2)3. Three main solutions and their evaluations (4)3.1 Solution One: External assistance (4)3.2 Solution Two: Adjustment of fracture of EU (4)3.3 Solution three: Internal control (5)4. Conclusion (5)5. List of reference (6)What is the best solution to the European Sovereign Debt Crisis?1.Introduction1After the American sub-prime crisis happened in 2006, the issue of financial crisis aroused the attention of economists, researchers, policymakers, and even the public in the worldwide arena because of its terrible negative impacts on the global economy. However, while governments of different countries tried to do their utmost to redevelop the domestic economy under the shock of the sub-prime crisis, the European Sovereign Debt Crisis, which may be regarded as the continuation of the sub-prime crisis, suddenly emerged. Accordingly, the European countries immediately put forward various solutions to cope with this challenge in order to minimize the economic loss and to recover from the recession as soon as possible. Among those measures taken or proposed, internal control or reform implementing to both the individual euro-zone country and the whole European Union (EU) seems to be the best solution with the most importance to tackle this difficulty, which may maintain sustainable development in the long run. In this essay, I will firstly conduct a brief analysis of the causes accounting for it based on depicting the major features. Furthermore, the main focus will be put on the solutions and theirs evaluations in order to find the best one.2.The causes of the European Sovereign Debt Crisis (ESDC)2.1The major features of the ESDCThe European sovereign debt crisis started in 2008, with the collapse of Iceland's banking system, and spread to primarily to Portugal , Ireland ,Italy,Greece, and Spanish –the “PIIGS” as they are sometimes known,during 2009 and 2010. The debt crisis led to a crisis of confidence for European businesses and economies. The ESDC belongs to financial crisis, which is also an indirect result of the U.S. “sub-prime crisis”. As Mishkin (1992(2),p.115) defined the “Financial Crisis” as “a disruption to financial markets in which adverse selection become much worse, so that financial market are unable to efficiently chan nel funds”, it is accessible to infer some general features, for instance ,the economic recession, in all the financial crisis, which the ESDC has as well. From a closer look at the historical process of this event, in my opinion, the three major indicators or features are: the downgrade of the debt rating, the sovereign borrowers’ sudden loss of access to funding market and the financial deficit of the euro-zone countries. The work of Thomas (February 28, 2013)pointed out that the three crises in different stages of final resolution are:(1) a sovereign funding crisis;(2) a bank crisis;(3) a balance of payment crisis, which may be compatible with the features. Therefore,from my perspective, the ESDC may relect the fact that it is difficult for some european coutries to refinance their fiscal expenditure .2.2Causes of the ESDC2Before the explanation of the causes, it is necessary to describe some useful information about the European Union (EU)-the subject of this crisis-to construct the analytical foundation. The European Union (EU) is an international organization constituted of 27 members on condition of signing the Maastricht Treaty (1843). Due to these economic rules the euro-zone countries bound into, the members not only maintain interests, also get limitation .For example, The Stability and Growth Pact (1999) set limits on the size of annual budget deficit at 3% of GDP and the stock of public debt of 60% of GDP. However, the members can borrow at much cheaper rates.The European Sovereign Debt Crisis resulted from a combination of complex factors , including the globalization of finance ; easy credit conditions during the 2002-2008 period ; real-estate bubbles ; the 2008-2012 global recession; and so on . However, in this essay, I put emphasis on three main enforcing factors: (1) excessive consumption; (2) lack of policy flexibility; (3) loss of confidence.Firstly, because of the cheaper interest rate, some countries, for instance, the PIIGS, used too much credit to consume more, to establish the generous social systems, which leading to a serious payment deficit. The data shown in Figure 1 are the best evidence to prove the existence of excess consumption.Source: Data from IMF Public Debt Database (Lane, Volume 26, Number 3,Summer 2012)Secondly, with the introduction of the Euro, these euro-zone countries adopt the same fiscal policy in spite of the economic imbalance between each other. As a result, when the crisis appeared, they have no power to devalue the currency immediately. The lack of policy flexibility unavoidably expands the ill-effect on these countries.Lastly, the successive fall in debt rating and the weak future expectancy directly impairs the confidence of these countries. The panic spread rapidly by the complicated interconnection formed previously, which is referred to the financial contagion.33.Three main solutions and their evaluations3.1Solution One: External assistanceAs the event of ESDC peaked in Greece, I will firstly evaluate the benefits and drawbacks of support measures taken to Greece .According to THOMAS( February 28, 2013), by April 2010, Greece had lost access to debt markets, therefore, in May 2012, Greece received a conditional €110 billion financing package, later supplemented by a second package in February 2012 that included losses for private sector holders of Greek debt. In addition, not only the European Union (EU) issued the European Financial Stability Facility (EFSF) in May 2010 to raise funds needed to provide loans to Euro-zone members in trouble, to buy sovereign debt and to recapitalise banks, but the European Central Bank (ECB) also has bought government and private debt securities in the open market, as by doing so it provides liquidity or cash to the government or organisation selling the debtsecurities( (2012.The European Debt Crisis, Volume 2012 (04)).Obviously, the most direct solution to solve the financial crisis is to provide financial support to maintain the sufficient liquidity again. The extra lending may prevent the negative impact from spreading on other recipient countries. However, it is unwise for an authority to depend largely on external assistance, which may include uncertainty and unsafety. For example, for this time, if the financial assistance from the EU or the ECB was withdrawn by certain reasons, or delayed after a long period, the effectivity of solution one would greatly be impaired. Therefore, solution one might just be suitable to the prime stage of the crisis based on condition that the financial support is sufficient and available3.2Solution Two: Adjustment of fracture of EUWith regard to the ESDC, an option involving the expulsion or departure of Greece from the Euro owing to its default had been suggested. Advocates claims that by doing so, the domino effect-the financial contagion -might be controlled and this would help rebuild confidence of the remaining Euro-zone members. Maybe it is unkind to ssacrifice the weakest member (Greece) to just make the rest safer, and consequently, Greece would suffer significant pain as a result of falling out of EU. We cannot deny that solution two might be implemented with the minimum expense. Equally, for fear of becoming the second Greece, the rest countries would abide more rigorously to any fiscal rules imposed on them. However, after deep research in solution two, some economists have concerns that this realistic approach may harm the integrity of the EU, and pose disunity problems in the future. Adrian.B (2012) mentioned that the adjustment of Euro structure is likely to cause inflation and to irritate certain countries to leave in future. In a word, in spite of high efficiency of solution two, it4tends to be regarded a short-sighted method, which cannot maintain sustainability inlong-term performance.3.3Solution three: Internal controlThe proposa l “internal management and control” has been around for a long period since the large-scale financial crisis initially come about dated back to 20th century. The specific measures under this conception will vary depending on different situations. In term of the European Sovereign Debt Crisis, from the perspective from the individual member, internal control should be divided into two parts: the austerity policy and the internal devaluation.On one hand, the austerity policy aims at cutting fiscal expenditure to the limitation of tax revenue and guiding rational consumption. To be specific, in the total expenditure in Greece, the cost of building generous social system and that of construction boom accounted for the largest percentage. Therefore, the internal controls of Greece should set up with the bubbles of real estate and unreasonable welfare cost. The new head of the IMF, Christine Lagarde, also admitted (2012), the austerity measures and the promotion of growth is of more significance to these countries.On the other hand, the success implement of “the internal devaluation” in Estonia to recover from the economic recession provides sufficient evidence and greatly confirms the feasibility of the practice “internal controls”. In the work “ Estonia and th e European Debt Crisis” (Parts, 2013), the author explained “internal control”- the money supply is dependent on the amount of foreign currency and assets reserves, which could ensure the trust in the currency and be open to the international capital flows. Therefore, the European countries should pay more attention to the economic imbalance between each other and improve the flexibility of policymaking, which may slowdown the rapid spread speed of the crisis.Comparing to the aforementioned solutions, it is obvious that solution three might be the best one because of its moderation and sustainability.4.ConclusionIn recent years, with the development of economic globalization, the regional financial crisis could not only become more frequent , but also enlarge its negative effects in the worldwide range. Thus, solving this crisis will have a few of profound implications such as the economic growth, the social stability and so on. Compared with the first two solutions, solution three “internal control” might b e the best solution because it has less disadvantages and more significance. As a result, more internal strategies should be put forward to strengthen the ability of individual country to rebuild the competitiveness. However, the external assistance5and the internal controls are not mutually exclusively. It will be wiser for the governments of the euro-zone countries to combine two measures together to attain the greater effectivity in solving this terrible crisis.5.List of referenceMishkin, F. S. (1992(2)). Anatomy of a financial crisis. Evolutionary Economics , 115-130.THOMAS, J. M. (February 28, 2013). A Brief History of the European Debt Crisis, 2010 - 2013.Economic Outlook, 1-9.Lane, P. R. (Volume 26, Number 3,Summer 2012). The European Sovereign Debt Crisis.Journal of Economic Perspectives, 49–68.2012.The European Debt Crisis. (Volume 2012 (04)). ACCA, 1-7.Blundell-Wignall, A. (Volume 2011(2)). Solving the Financial and Sovereign Debt Crisis in Europe. Financial Market Trends, 2-22.Parts, J. (2013). ESTONIA AND THE EUROPEAN DERT GRISIS. Cato Journal, Vol. 33, No. 2, 269-274.6。