Adopting the Euro affects a country's sovereign debt dynamics and risk profile
Economic literature demonstrates that adopting a common currency alters sovereign debt dynamics, introducing distinct risk factors such as redenomination and default risk premia alongside varying vulnerability to debt crises.
The retrieved papers provide robust theoretical and empirical support indicating that membership in a monetary union (such as the Eurozone) significantly impacts sovereign debt markets, yields, borrowing costs, and risk profiles due to factors like asymmetric fiscal policies, lack of independent monetary adjustments, and redenomination risks. Papers [1], [3], [4], [6], and [11] explicitly address these monetary union debt dynamics. Papers [0], [2], [7], [8], [9], and [10] discuss fiscal rules, general debt, or other monetary unions (like WAEMU) but do not contradict the claim; they offer compatible or tangential contexts. Therefore, the claim is well-supported.
J. Costain, Galo Nuño, Carlos Thomas. The Term Structure of Interest Rates in a Heterogeneous Monetary Union. 2025. https://doi.org/10.2139/ssrn.4156014
The study models yield curves and sovereign default risk in a heterogeneous monetary union, showing how credit risk premiums shift within the euro area.
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Stefano Corradin, B. Schwaab. Euro area sovereign bond risk premia before and during the Covid-19 pandemic. 2023. https://doi.org/10.1016/j.euroecorev.2023.104402
The research analyzes euro area sovereign bond yield components, demonstrating the distinct presence of default, redenomination, and liquidity risk premia.
Yong Jin Kim, Chul‐In Lee. SOVEREIGN DEBT CRISIS IN A MONETARY UNION: ACCOUNTING FOR EXCESSIVE DEBT, HOUSING BUBBLES, AND THE TRANSMISSION OF CRISES. 2018. https://doi.org/10.1111/ecin.12745
The paper uses a growth model with collateral constraints in a monetary union to explain how peripheral economies become vulnerable to sovereign debt crises.
Cristina Badarau, Florence Huart, Ibrahima Sangaré. Sovereign Risk Premium and Divergent Fiscal Policies in a Monetary Union. 2015. https://doi.org/10.3917/redp.246.0867
The study examines sovereign risk premia and divergent fiscal policies within a monetary union, highlighting how asymmetric shocks increase long-term borrowing costs.
Huixin Bi, Andrew T. Foerster, Nora Traum. Asset Purchases in a Monetary Union with Default and Liquidity Risks . 2024. https://doi.org/10.2139/ssrn.5044312
The research quantifies sovereign default and liquidity risks within a two-country monetary union framework, noting how market perceptions of fiscal solvency affect macroeconomic stability.
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