The European sovereign debt crisis: What have we learned?

This paper sets the background for the Special Issue of the Journal of Empirical Finance on the European Sovereign Debt Crisis. It identifies the channel through which risks in the financial industry leaked into the public sector. It discusses the role of the bank rescues in igniting the sovereign ndebt crisis and reviews approaches to detect early warning signals to anticipate the buildup of crises. It concludes with a discussion of potential implications of sovereign distress for financial markets.