Euro Crisis

12 Key excerpts on "Euro Crisis"

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  The Crisis behind the Eurocrisis

  The Eurocrisis as a Multidimensional Systemic Crisis of the EU

  • Eva Nanopoulos, Fotis Vergis(Authors)
  • 2019(Publication Date)
  • Cambridge University Press

    (Publisher)

  37 When the global financial crisis hit in 2008, it set off a worldwide process of financial retrenchment within home state borders and the scaling back of cross- border exposure. The eurozone crisis was a much more concentrated version of this global phenomenon. Imbalances began unravelling instantly and led as early as 2009 to a ‘great bargain’ between the national governments, the ECB and the 36 See in particular P Bofinger, ‘German Wage Moderation and the EZ Crisis’ CEPR’s Policy Portal (30 November 2015) https://voxeu.org/article/german-wage-moderation-and-ez-crisis accessed April 2018; C Dustmann and others, ‘From Sick Man of Europe to Economic Superstar: Germany’s Resurgent Economy’ (2014) 28 Journal of Economic Perspectives 167. 37 On cross-border capital flows in the eurozone crisis, see PR Lane, ‘Capital Flows in the Euro Area’ (2013) European Economy Economic Papers 497; A Hobza and S Zeugner, ‘The “Imbalanced Balance” and Its Unravelling: Current Accounts and Bilateral Financial Flows in the Euro Area’ (2014) European Economy Economic Papers 520. 306 Christakis Georgiou banks, 38 whereby the ECB agreed to provide additional liquidity to the banks so that these could continue buying their home Member States’ bonds and prevent what would be the defining feature of the crisis in 2010–12, namely a run on sovereign bond markets. But neither the banks nor the ECB were happy with this bargain and they expected the governments to take other measures to ensure the liquidity of Member States. The banks resented what they saw as financial repression and the fact that they could no longer treat the EU as a single financial market, whereas the ECB resented having to take on too much risk by expanding its balance sheet for the purpose of ensuring Member State liquidity. Both the banks and the ECB were thus from the very beginning keen on measures that would in effect Europeanise, at least to some extent, banking policy and fiscal liability.

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  The Frontiers of Europe

  A Transatlantic Problem?

  • Federiga Bindi, Irina Angelescu, Federiga Bindi, Irina Angelescu(Authors)
  • 2011(Publication Date)
  • Brookings Institution Press

    (Publisher)

  A fter three years of financial crisis, a great recession, and a year of tur-moil over sovereign debt in Europe, in 2011 the euro area faces its largest chal-lenge since its creation. It is now trying to establish a new basis for the future. The optimism of mid-2009 about the beneficial effect of the euro in protect-ing its members from sudden destabilizing currency fluctuations has been replaced by doubts about the viability of the project and the search for a new equilibrium. In mid-2009, when the global financial crisis was showing signs of abating and the recession began to relent, the consensus in Europe was that the euro had sheltered its member states from even worse outcomes, prevent-ing major disruptive devaluation within the area. An authoritative assessment of ten years of euro history concluded then that “in the midst of the greatest financial crisis of the last 70 years, the world’s only transnational major cur-rency has delivered price stability to the people of the Euro area, retained its value in international markets and proven capable of weathering the storm. . . . While a few increasingly shrill and lonely naysayers remain, the Euro has amply demonstrated its sustainability.” 1 Assessed from the viewpoint of early 2011, such words seem to belong to a different era. The years 2010 and 2011 have been characterized by crises: the Greek debt crisis and the creation of the European Financial Stability Mecha-nism, followed by the Irish crisis and fear of further contagion and debt restructuring by some countries. These events have led to a dramatic reversal of some of the principles on which the euro was conceived (the prohibition for member states to bail out other national governments or for the European Central Bank (ECB) to buy their public debt or to monetize it). The IMF has returned to Europe, and now five EU members are receiving IMF loans and fol-166 13 The Euro Crisis and the New Economic Governance luca einaudi

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  The Politics of Crisis in Europe

  • Mai'a K. Davis Cross(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  This growth was comparable to that of the United States during this period, averaging 2.1 percent per year (Buti, Deroose, Gaspar, and Martins 2010). 3 When the global financial crisis of 2008–9 arrived on European shores, the EU’s gradualist strategy, as well as the decade-long solid record for the euro and the single market, came under threat. The global financial crisis is obviously the context in which the Eurozone crisis occurred, but the emphasis in this chapter is on how this externally driven event influ- enced Europe. Specifically, the question I address is: why did the global financial crisis become an existential crisis for the EU? 4 2 Some have suggested that the monetary union could have worked as it was when it was originally launched, but they are generally in a minority. They might have been correct if it had not been for the global financial crisis, but it is difficult to know. 3 The growth rate of GDP per capita over this period was more or less the same for the Eurozone and United States. 4 Many scholars have correctly pointed out that beyond the financial dimension of the Eurozone crisis, there have been implications for the institutional and constitutional dimensions (Fossum 2014). The crisis has also affected the relationship between Eurozone and non-Eurozone member states. For the purposes of this chapter, I confine The Eurozone Crisis 161 This chapter begins with an analysis of the main perspectives on the origins of the Eurozone crisis, pointing out their strengths and limitations. The remainder of the chapter is then divided into two parts. In the first part, building on the existing debate, I argue that the Eurozone crisis cannot be fully understood without taking into account the socially con- structed nature of it, and especially the role of the media in amplifying fears and contributing to a sense of integrational panic.

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  Greek Tragedy, European Odyssey: The Politics and Economics of the Eurozone Crisis

  • Robert Godby, Stephanie Anderson, Stephanie Anderson, Robert Godby(Authors)
  • 2016(Publication Date)
  • Verlag Barbara Budrich

    (Publisher)

  Timeline of the Crisis Policy reactions to the eurozone crisis can be separated into two phases. The first represented an evolution of, and an increase in, the original types of policy efforts used to deal with the crisis as it degenerated during its first two years. These policy responses attempted to work within the existing structure of the eurozone and EU Treaty framework. Major policy actions were taken primarily by the eurozone member states and “the Troika”, i.e., the EU Commission, aided by the ECB, and the International Monetary Fund (IMF). The second stage occurred as a complementary set of actions that began to alter the architecture and treaty framework of the currency union, with one set of efforts undertaken by the ECB and the other by the EU Commission in cooperation with eurozone national governments. In this stage of the crisis, the ECB mostly initiated policy actions, while eurozone member states con-centrated on treaty reforms meant to alter the long-term structure of the euro-zone with respect to fiscal and banking sovereignty. These changes in EU structure and ECB practices would have likely been politically impossible before the crisis. However, after earlier policies that operated within the rules of the EU failed to arrest a worsening situation, a shift of outlook occurred allowing extraordinary measures to be taken. Necessity is often the mother of invention and so EU reforms have by necessity begun to develop the greater political integration some economic theorists have argued was required since the formation of the currency union. In the following section, a chronological summary of the major events of the crisis between 2009 and 2012 are detailed. While the immediate financial crisis may have ended in the latter half of 2012, conditions in Europe have remained fragile and depressed. More policy responses have been necessary to deal with its aftermath and to avoid another crisis occurring. Some of these efforts are also described.

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  In Good Times Prepare for Crisis

  From the Great Depression to the Great Recession: Sovereign Debt Crises and Their Resolution

  • Ira Lieberman(Author)
  • 2018(Publication Date)
  • Brookings Institution Press

    (Publisher)

  Most of these began as a banking crisis that morphed into an economic crisis and in some cases a sovereign debt crisis. In Ireland, Spain, and Great Britain (the latter to a lesser extent), the immediate trigger or spark for the crises was a real estate bust. George Soros commented on the crisis as follows: “The ‘Euro Crisis’ is generally seen as a currency crisis, but it is also a sovereign debt and, even more, a banking crisis. The situation is complex. The complexity has bred confusion, and this has political consequences. Europe’s various member states have formed widely different views and their policies reflect their views rather than their national inter-ests. The clash of perceptions carries the seeds of serious political conflict.” 1 The brief discussions of the crises that follow clearly illustrate Soros’s views, in-cluding those that happened outside the eurozone. 412 IN GOOD TIMES PREPARE FOR CRISIS Iceland In 2008 Iceland was the first of the European countries to enter into a deep financial/ currency crisis that then morphed into a deep economic and eventually an external sovereign debt crisis. The trigger was the collapse of Lehman Brothers in Septem-ber 2008, which brought to an abrupt end the large-scale capital flows, entirely out of proportion to the size of its economy or financial system to handle, that had en-tered Iceland during the years leading up to the crisis. As a small single-currency economy, Iceland lacked the capacity to resolve its own crisis. Like the emerging mar-ket countries discussed in Part III of this book and the eurozone countries discussed in this chapter, Iceland had to be rescued or bailed out by the International Mone-tary Fund (IMF) and the Nordic countries serving as lenders of last resort. Collapse of the Currency and the Banking System In the dramatic financial/currency crisis that began in 2008 the Icelandic krona (ISK) collapsed, and so did the banking system.

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  Routledge Handbook of the Economics of European Integration

  • Harald Badinger, Volker Nitsch, Harald Badinger, Volker Nitsch(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  It will purchase assets each month amounting to €60 billion until September 2016 (in total €1.1 trillion). 30 Both actions were able to stabilize the upward trend in the spreads of sovereign bonds of the periphery countries. The interest rates of their bonds declined considerably since autumn 2012. And the euro revaluated since July 2012 up to May 2014 continuously by 13 percent. 31 The weak economic perspectives (with the fear of a “secular stagnation” 32) due to the Ukraine–Russia conflict and the unresolved Greek debt crisis again weakened the euro. 4 Conclusions Since 2007/08 the industrial world suffered from a sequence of crises: first the GFC 2008, followed by the Great Recession 2009 and – a specialty of Europe – the Euro Crisis since 2010. Each crisis has a typical causal structure. The GFC was triggered by the housing bubble (subprime crisis) in connection with risky banking activity leading to a banking crisis in the US. The consequence was a Great Recession in the US and because of its spill-over to Europe also a considerable drop in GDP in Europe. The GFC and the Great Recession acted as asymmetric shocks to the Member States of the Euro area leading to the Euro Crisis. As was already forecast ex ante to the introduction of the Euro, countries which were not able to adjust by “internal devaluation” (because of the loss of the instrument of their own exchange rate changes) suffered the most. The Euro Crisis was homemade and the outcome of a trinity of causes (debt, banking, macro-imbalances), which interacted in a vicious circle together. The major lesson from the Euro Crisis was that the asymmetric policy design of the EMU was not crisis-proven. Therefore a whole range of measures were implemented to make the Euro area fitter for future crises

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  The Escape from Balance Sheet Recession and the QE Trap

  A Hazardous Road for the World Economy

  • Richard C. Koo(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 5 Euro Crisis—Facts and Resolution

  The unfolding Euro Crisis offers a perfect opportunity to apply the teachings of balance sheet recession theory. The concept of balance sheet recessions is essential to understanding this crisis from both a macroeconomic (weakening economy) and a microeconomic (widening competitive gap) perspective, but in Europe there are far fewer people who understand this theory than in Japan, the United States, or the United Kingdom.

  The crisis erupted when Greece's fiscal profligacy was revealed. But the real tragedy was that countries in balance sheet recessions—the opposite of the state Greece was in—were forced to respond in the same way as Greece, tipping them into deflationary spirals. Events unfolded in this way for two reasons. First, the Maastricht Treaty that underlies the euro is a defective document that makes no allowance for countries in balance sheet recessions. Second, the plurality of government bond markets within the same currency zone means that the self-corrective mechanism for balance sheet recessions functions poorly, if at all, in the Eurozone.

  As noted in Chapter 1, the Eurozone, too, experienced a massive housing bubble. This bubble burst in 2007, as Figure 1.2 shows, prompting businesses and households in the affected countries to begin deleveraging and triggering numerous balance sheet recessions. Fiscal stimulus is essential to overcoming such recessions, and in 2009 Eurozone governments moved to provide such stimulus under an agreement reached at the emergency G20 summit in November 2008, soon after Lehman Brothers went under. The government spending that followed went a long way toward stabilizing and reviving the economies of the Eurozone.

  However, Greece was plunged into fiscal crisis after it was revealed at the end of 2009 that the government had been hiding the extent of its fiscal deficits, and that forced other Eurozone nations to engage in deficit-reduction efforts as well. This was an extremely destructive turn of events because while the Greek government had been spending far more than was warranted by the country's private-sector savings, other Eurozone nations were characterized by huge pools of unborrowed private savings as businesses and households moved collectively to repair their balance sheets. In effect, the governments of these countries began cutting their deficits just when they needed to borrow and spend this unborrowed savings via fiscal stimulus.

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  Europe and the Euro

  Integration, Crisis and Policies

  • Enrico Marelli, Marcello Signorelli(Authors)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  It was also accentuated by failed or wrong economic policy responses by the EU (see Chap. 6). One reaction was to have the private sector still undergo losses in cases of default or debt restructuring. This ‘private sector involve- ment’ is an understandable choice from certain points of view (e.g. to avoid problems of moral hazard), but when made at the height of the crisis, it accelerated the contagion effect. 25 The high and growing levels of spread originated from the perception that the sovereign debt of some countries in the euro area would be affected by the reappearance of two types of risks: (i) not only the default risk inherent to the presumed inability of a given country to repay its own debt at maturity, (ii) but also the risk connected to a change in the currency (similar to the devaluation risk in the pre-euro scenario). In fact, for first time since its inception, the markets were beginning to question the irreversibility of the common currency, fearing either the possibility of exit of individual countries from the Eurozone or even the disintegration of the monetary union itself: this risk was called the ‘currency redenomination risk’. 5 THE DOUBLE CRISIS IN THE EUROZONE 93 Ireland was thus directly contaminated at the end of 2010 (this country witnessed the systemic banking crisis transform into a sovereign debt crisis) as well as Portugal at the beginning of 2011: after some reluctance, both countries accepted EU’s support. Subsequently, in the summer of 2011, there was speculation about Spain and especially Italy. These two countries (especially the latter) were ‘too big to fail’ but also ‘too big to bail out’: that is, not only too big to be saved due to limited bailout funds but also too big to be allowed to fail due to possibly enormous contagion and the resulting systemic effects. 26 As shown in Fig. 5.1, the ‘spread crisis’ had a short duration; and, as a consequence, the effect on the debt service expenditure was limited.

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  Europe and the Financial Crisis

  • Pompeo Della Posta, Leila Simona Talani(Authors)
  • 2011(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  The global financial crisis quickly became a global economic crisis, which made necessary the resurrection of the Keynesian toolkit centred on government intervention. The US engaged in a $800 billion fiscal stimulus, while European countries provided further evidence of the lack of fiscal policy coordination among themselves. In order to absorb the negative effects of the crisis, many European governments pushed up excessively their fiscal expansion and, in the end, under the pressure of speculation, euro countries undertook a 120 billion euro intervention to support Greece. When, a few days later, the public debt crisis looked menacing for countries like Spain, Portugal and Ireland, the EU agreed, in a joint effort with the ECB and the IMF, to provide resources up to the amount of 750 billion euros. 15 Observers and analysts who were claiming that the crisis had clearly proven the limitations of neo-liberal policies and the unavoidability of government intervention had to accept, therefore, the rebuttal coming from free-market supporters, who were warning against the dangers of government intervention. Some of the peripheral European countries, whose national accounts were not sound, have been on the verge of a confidence crisis. The most signifi- cant case has been the one of Greece, whose public debt was the object of a devastating speculative attack. It can hardly be claimed, however, that the Greek public debt crisis is further proof of the bad consequences of government intervention into the economy. What happened in Greece was a case of fraudulent behaviour, where the government that ruled the country from 2004–9 manipulated the national accounts to hide the growing fiscal deficit and public debt.

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  European Disintegration?

  The Politics of Crisis in the European Union

  • Douglas Webber(Author)
  • 2018(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  To a significant extent, when the German and French governments bailed out these countries in the Eurozone Crisis, they were, indirectly and The Eurozone Crisis 97 surreptitiously, bailing out their own banks, to which they had already given considerable, but unpopular, financial aid earlier in the GFC (Legrain 2014 : 79–80; Varoufakis as quoted in Libération 2017; Varoufakis 2017 : 21–27). Indeed, of €216bn aid granted to Greece in the first and second bail-outs, less than 5 per cent reached the Greek fiscal budget, while by far the biggest part went to ‘existing creditors in the form of debt repayments and interest payments’ (Rocholl and Stahmer 2016 : 4, 19). The macro-economic fallout from a Eurozone collapse could have also have been very severe. With the Finance Ministry foreseeing a deep economic recession and a rise of German unemployment to over 5 million in the first year after a hypothetical re-in-troduction of a new German currency (see above), finance minister Schäuble judged that, compared with co-financing bail-outs, the collapse of the Euro-zone would have been much more expensive for Germany (as quoted in Financial Times 2013c). All in all, Germany was ‘too closely extricated’ in the euro and the Eurozone and its crisis to be able to ‘get out of it again’ (interview, Berlin, 2018). The history of the Eurozone Crisis up to 2018 thus bore out – to some extent at least – the expectations of ‘optimistic’ (neo-functionalist, transac-tionalist and liberal intergovernmentalist) theorists that the impact of the levels of financial and economic interdependence forged by the sharing of a single currency would outweigh that of the centrifugal forces of domestic politics and generate even more powerful centripetal pressures in favour of (albeit asymmetrical) compromise. This is not to say, however, that govern-ments’ responses to the Eurozone Crisis were shaped only, or perhaps even primarily, by financial motives.

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  The European Union and the Eurozone under Stress

  Challenges and Solutions for Repairing Fault Lines in the European Project

  • John Theodore, Jonathan Theodore, Dimitrios Syrrakos(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Following the financial crash of 2008, European nations have been busy restructuring and rebalancing their economies, with varying suc- cess. Substantial sovereign and bank debt led the Eurozone to fall into a prolonged recession in 2011 as the extent of its problems became fully aware. This is in contrast to the far stronger growth rates being seen in the United Kingdom and the USA. Furthermore, deflation is now a severe and rising threat to the entire Eurozone. The question has been ceaselessly asked since 2010: how and in what form the region can 38 Gros and Thygesen, European Monetary Integration: From EMS to EMU. Longman, London (1998). 39 Artis and Zhang, ‘International Business Cycles and the ERM: Is There a European Business Cycle?’ Oxford Economic Papers 51, pp. 1–16 (1997). Artis, ‘Should the UK Join EMU?’ National Institute Economic Review 171, pp. 70–81 (2000). 40 Artis, M. and Zhang, W. ‘International Business Cycles and the ERM: Is There a European Business Cycle?’ International Journal of Finance and Economics, 2:1, pp. 1–16 (1997). Fiscal Consolidation and Austerity 49 survive? Since then the mood for an ‘austerity’-based rescue programme has changed dramatically, and the effectiveness of this approach in achieving real growth and debt recovery in the Eurozone is even being questioned by the IMF – its proponent for financial crises round the globe for decades. Clearly, what has become so urgently at stake since the beginning of the debt crisis in 2010 is not only the survival of the single currency but the entire growth model that they will have to follow to maintain any kind of economic coherence. Currently, Germany imposes its own export-orientated model to the rest EMU member countries, which reflects, as discussed, a significant departure from the policies adopted in the past.

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  Global Banking, Financial Markets and Crises

  • Bang Nam Jeon, Maria Pia Olivero, Bang Nam Jeon, Maria Pia Olivero(Authors)
  • 2013(Publication Date)
  • Emerald Group Publishing Limited

    (Publisher)

  Source : Developments in India’s balance of payments during third quarter (October December) of 2012 2013, RBI Monthly Bulletin , June 2013. Available at www.rbi. org.in. 347 Eurozone Debt Crisis: Implications for the Indian Banking Sector borrowing ( Fagan & Gaspar, 2007 ). This led to sharp shooting up of the domestic credit levels in the Eurozone. Fig. 3 illustrates the growth of domestic credit in select Eurozone coun-tries viz., Portugal, Ireland, Italy, Greece, Spain, and Sweden. One of the key predictors of a banking crisis is the scale of the domestic credit preced-ing the boom ( Gourinchas & Obstfeld, 2012 ). There was a sudden upshot in the dispersion of domestic credit and heating up of current account deficits during 2003 2007 though not during the onset of euro in 1999 ( Lane & McQuade, 2012 ; Lane & Pels, 2012 ). The crisis has posed serious challenges for the banking sector. Deficient policy actions and not enough reforms of the banking sector have left seg-ments of the global banking system vulnerable to further shocks. Many institutions particularly weaker European banks are caught in a mael-strom of interlinked pressures that are intensifying risks for the system as a whole ( Fig. 4 ). In order to address the challenges posed by the debt crises the affected countries could consider some of the solutions like: (i) restructuring the portfolios of the banks to strengthen the tail, (ii) providing policy clarity on the private sector bail-ins to address the investor concerns, (iii) reducing the reliance on short-term wholesale funding to relieve the funding pres-sures, (iv) introducing rigorous stress tests and transparency in governance mechanisms to address to the asset-quality concerns, (v) tightening fiscal consolidation and being prudent in macro-economic management than Table 2.

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