AEI Resident fellow Alex Pollock examines past sovereign debt crises, especially the European crisis of the 1920s, in the context of the current economic situation for a piece in the latest Financial Services Outlook and the Wall Street Journal.

The ongoing sovereign debt crisis in Europe continues to weigh heavily oncredit markets and political systems throughout the developed world. 

History shows us that sovereign governments often default on their loans, particularly in times of war or economic upheaval. Europe finds itself in this situation now and would do well to examine past sovereign debt crises—particularly, the European sovereign debt crisis of the 1920s—for lessons.

The most likely source of a U.S. sovereign debt crisis is a failure of the U.S. political system to address the growth of the major entitlement programs--Social Security, Medicare and Medicaid.

On May 6, all eyes will be focused on the second round of the French presidential election, which Socialist challenger Francois Hollande is likely to win. Equally important for Europe’s future is the Greek parliamentary election scheduled for the very same day.

The United States' budget deficit has placed its public finances on a clearly unsustainable path, even before considering the serious public finance problems at the state level. US public debt levels as a percent of GDP are on a path to reach within a year or two those levels at which a funding crisis in Europe's periphery was triggered.

A banking crisis in Europe, coupled with a renewed European economic downturn, will have serious implications for the global economic recovery.

When markets are irrational, it's impossible to say what might set them off, and fear of disaster becomes a powerful excuse for policy makers to do whatever they choose.