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The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
(EU) from 2009 until the mid to late 2010s. Several
eurozone The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU pol ...
member states (
Greece Greece,, or , romanized: ', officially the Hellenic Republic, is a country in Southeast Europe. It is situated on the southern tip of the Balkans, and is located at the crossroads of Europe, Asia, and Africa. Greece shares land borders wi ...
,
Portugal Portugal, officially the Portuguese Republic ( pt, República Portuguesa, links=yes ), is a country whose mainland is located on the Iberian Peninsula of Southwestern Europe, and whose territory also includes the Atlantic archipelagos of th ...
,
Ireland Ireland ( ; ga, Éire ; Ulster-Scots: ) is an island in the North Atlantic Ocean, in north-western Europe. It is separated from Great Britain to its east by the North Channel, the Irish Sea, and St George's Channel. Ireland is the s ...
,
Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = '' Plus ultra'' (Latin)(English: "Further Beyond") , national_anthem = (English: "Royal March") , ...
, and
Cyprus Cyprus ; tr, Kıbrıs (), officially the Republic of Cyprus,, , lit: Republic of Cyprus is an island country located south of the Anatolian Peninsula in the eastern Mediterranean Sea. Its continental position is disputed; while it is ...
) were unable to repay or refinance their
government debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
or to bail out over-indebted banks under their national supervision without the assistance of third parties like other eurozone countries, the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
(ECB), or the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF). The eurozone crisis was caused by a balance-of-payments crisis, which is a sudden stop of foreign capital into countries that had substantial deficits and were dependent on foreign lending. The crisis was worsened by the inability of states to resort to
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
(reductions in the value of the national currency) due to having the Euro as a shared currency. Debt accumulation in some eurozone members was in part due to macroeconomic differences among eurozone member states prior to the adoption of the euro. The European Central Bank adopted an interest rate that incentivized investors in Northern eurozone members to lend to the South, whereas the South was incentivized to borrow because interest rates were very low. Over time, this led to the accumulation of deficits in the South, primarily by private economic actors. A lack of fiscal policy coordination among eurozone member states contributed to imbalanced capital flows in the eurozone, while a lack of financial regulatory centralization or harmonization among eurozone states, coupled with a lack of credible commitments to provide bailouts to banks, incentivized risky financial transactions by banks. The detailed causes of the crisis varied from country to country. In several countries, private debts arising from a property
bubble Bubble, Bubbles or The Bubble may refer to: Common uses * Bubble (physics), a globule of one substance in another, usually gas in a liquid ** Soap bubble * Economic bubble, a situation where asset prices are much higher than underlying fund ...
were transferred to sovereign debt as a result of banking system
bailout A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global sys ...
s and government responses to slowing economies post-bubble. European banks own a significant amount of sovereign debt, such that concerns regarding the solvency of banking systems or sovereigns are negatively reinforcing. The onset of crisis was in late 2009 when the Greek government disclosed that its budget deficits were far higher than previously thought. Greece called for external help in early 2010, receiving an EU–IMF bailout package in May 2010. European nations implemented a series of financial support measures such as the
European Financial Stability Facility The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the objectiv ...
(EFSF) in early 2010 and the
European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It ...
(ESM) in late 2010. The ECB also contributed to solve the crisis by lowering
interest rates An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
and providing cheap loans of more than one trillion euro in order to maintain money flows between European banks. On 6 September 2012, the ECB calmed financial markets by announcing free unlimited support for all eurozone countries involved in a sovereign state bailout/precautionary programme from EFSF/ESM, through some yield lowering Outright Monetary Transactions (OMT)."Technical features of Outright Monetary Transactions"
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
Press Release, 6 September 2012
Ireland and Portugal received EU-IMF bailouts In November 2010 and May 2011, respectively. In March 2012, Greece received its second bailout. Both Spain and Cyprus received rescue packages in June 2012. Return to economic growth and improved structural deficits enabled Ireland and Portugal to exit their bailout programmes in July 2014. Greece and Cyprus both managed to partly regain market access in 2014. Spain never officially received a bailout programme. Its rescue package from the ESM was earmarked for a bank recapitalisation fund and did not include financial support for the government itself. The crisis has had significant adverse economic effects and labour market effects, with unemployment rates in Greece and Spain reaching 27%, and was blamed for subdued economic growth, not only for the entire eurozone but for the entire European Union. It had a major political impact on the ruling governments in 10 out of 19 eurozone countries, contributing to power shifts in Greece, Ireland, France, Italy, Portugal, Spain, Slovenia, Slovakia, Belgium, and the Netherlands as well as outside of the eurozone in the United Kingdom.


Causes

The eurozone crisis resulted from the structural problem of the eurozone and a combination of complex factors. There is a consensus that the root of the eurozone crisis lay in a balance-of-payments crisis (a sudden stop of foreign capital into countries that were dependent on foreign lending), and that this crisis was worsened by the fact that states could not resort to
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
(reductions in the value of the national currency to make exports more competitive in foreign markets). Other important factors include the globalisation of finance; easy credit conditions during the 2002–2008 period that encouraged high-risk lending and borrowing practices; the
financial crisis of 2007–08 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
; international trade imbalances;
real estate bubble A real-estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real-estate markets, and typically follow a land boom. A land boom is the rapid increa ...
s that have since burst; the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
of 2008–2012; fiscal policy choices related to government revenues and expenses; and approaches used by states to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses. Macroeconomic divergence among eurozone member states led to imbalanced capital flows between the member states. Prior to the adoption of the euro, Southern eurozone member states grew rapidly (with rising wages and prices) whereas Northern eurozone members grew slowly. Despite these different macroeconomic conditions, the European Central Bank could only adopt one interest rate, choosing one that meant that real interest rates in Germany were high (relative to inflation) and low in Southern eurozone member states. This incentivized investors in Germany to lend to the South, whereas the South was incentivized to borrow (because interest rates were very low). Over time, this led to the accumulation of deficits in the South, primarily by private economic actors. Comparative
political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...
explains the fundamental roots of the European crisis in varieties of national institutional structures of member countries (north vs. south), which conditioned their asymmetric development trends over time and made the union susceptible to external shocks. Imperfections in the Eurozone's governance construction to react effectively exacerbated macroeconomic divergence. Eurozone member states could have alleviated the imbalances in capital flows and debt accumulation in the South by coordinating national fiscal policies. Germany could have adopted more expansionary fiscal policies (to boost domestic demand and reduce the outflow of capital) and Southern eurozone member states could have adopted more restrictive fiscal policies (to curtail domestic demand and reduce borrowing from the North). Per the requirements of the 1992
Maastricht Treaty The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve member states of the European Communities, it announced "a new stage in the ...
, governments pledged to limit their
deficit spending Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
and debt levels. However, some of the signatories, including Germany and France, failed to stay within the confines of the Maastricht criteria and turned to securitising future government revenues to reduce their debts and/or deficits, sidestepping best practice and ignoring international standards.How Europe's Governments have Enronized their debts
" Mark Brown and Alex Chambers, Euromoney, September 2005
This allowed the sovereigns to mask their deficit and debt levels through a combination of techniques, including inconsistent accounting, off-balance-sheet transactions, and the use of complex currency and credit derivatives structures. From late 2009 on, after Greece's newly elected,
PASOK The Panhellenic Socialist Movement ( el, Πανελλήνιο Σοσιαλιστικό Κίνημα, Panellínio Sosialistikó Kínima, ), known mostly by its acronym PASOK, (; , ) is a social-democratic political party in Greece. Until 2012, it ...
government stopped masking its true indebtedness and budget deficit, fears of
sovereign default A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
s in certain
European states The list below includes all entities falling even partially under any of the various common definitions of Europe, geographical or political. Fifty generally recognised sovereign states, Kosovo with limited, but substantial, international reco ...
developed in the public, and the government debt of several states was downgraded. The crisis subsequently spread to Ireland and Portugal, while raising concerns about Italy, Spain, and the European banking system, and more fundamental imbalances within the eurozone. The under-reporting was exposed through a revision of the forecast for the 2009 budget deficit from "6–8%" of GDP (no greater than 3% of GDP was a rule of the
Maastricht Treaty The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve member states of the European Communities, it announced "a new stage in the ...
) to 12.7%, almost immediately after PASOK won the October 2009 Greek national elections. Large upwards revision of budget deficit forecasts due to the international financial crisis were not limited to Greece: for example, in the United States forecast for the 2009 budget deficit was raised from $407 billion projected in the 2009 fiscal year budget, to $1.4 trillion, while in the United Kingdom there was a final forecast more than 4 times higher than the original. In Greece, the low ("6–8%") forecast was reported until very late in the year (September 2009), clearly not corresponding to the actual situation. Fragmented
financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handle ...
contributed to irresponsible lending in the years prior to the crisis. In the eurozone, each country had its own financial regulations, which allowed financial institutions to exploit gaps in monitoring and regulatory responsibility to resort to loans that were high-yield but very risky. Harmonization or centralization in financial regulations could have alleviated the problem of risky loans. Another factor that incentivized risky financial transaction was that national governments could not credibly commit not to bailout financial institutions who had undertaken risky loans, thus causing a
moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
problem.


Evolution of the crisis

The European debt crisis erupted in the wake of the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
around late 2009, and was characterized by an environment of overly high government structural deficits and accelerating debt levels. When, as a negative repercussion of the Great Recession, the relatively fragile banking sector had suffered large capital losses, most states in Europe had to bail out several of their most affected banks with some supporting recapitalization loans, because of the strong linkage between their survival and the financial stability of the economy. As of January 2009, a group of 10 central and eastern European banks had already asked for a
bailout A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy. A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global sys ...
. At the time, the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
released a forecast of a 1.8% decline in EU economic output for 2009, making the outlook for the banks even worse. The many public funded bank recapitalizations were one reason behind the sharply deteriorated
debt-to-GDP ratio In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured ...
s experienced by several European governments in the wake of the Great Recession. The main root causes for the four sovereign debt crises erupting in Europe were reportedly a mix of: weak actual and potential growth; competitive weakness;
liquidation Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistrib ...
of banks and sovereigns; large pre-existing debt-to-GDP ratios; and considerable liability stocks (government, private, and non-private sector). In the first few weeks of 2010, there was renewed anxiety about excessive national debt, with lenders demanding ever-higher interest rates from several countries with higher debt levels, deficits, and current account deficits. This in turn made it difficult for four out of eighteen eurozone governments to finance further budget deficits and repay or refinance existing
government debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
, particularly when economic growth rates were low, and when a high percentage of debt was in the hands of foreign creditors, as in the case of Greece and Portugal. The states that were adversely affected by the crisis faced a strong rise in interest rate spreads for government bonds as a result of investor concerns about their future debt sustainability. Four eurozone states had to be rescued by sovereign bailout programs, which were provided jointly by the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
and the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
, with additional support at the technical level from the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
. Together these three international organisations representing the bailout creditors became nicknamed "the
Troika Troika or troyka (from Russian тройка, meaning 'a set of three') may refer to: Cultural tradition * Troika (driving), a traditional Russian harness driving combination, a cultural icon of Russia * Troika (dance), a Russian folk dance Pol ...
". To fight the crisis some governments have focused on raising taxes and lowering expenditures, which contributed to social unrest and significant debate among economists, many of whom advocate greater deficits when economies are struggling. Especially in countries where budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged with the widening of bond
yield spread Yield may refer to: Measures of output/function Computer science * Yield (multithreading) is an action that occurs in a computer program during multithreading * See generator (computer programming) Physics/chemistry * Yield (chemistry), the amo ...
s and risk insurance on CDS between these countries and other
EU member states The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been de ...
, most importantly Germany. By the end of 2011, Germany was estimated to have made more than out of the crisis as investors flocked to safer but near zero interest rate German federal government bonds (''bunds''). By July 2012 also the Netherlands, Austria, and Finland benefited from zero or negative interest rates. Looking at short-term government bonds with a maturity of less than one year the list of beneficiaries also includes Belgium and France. While Switzerland (and Denmark) equally benefited from lower interest rates, the crisis also harmed its export sector due to a substantial influx of foreign capital and the resulting rise of the
Swiss franc The Swiss franc is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) issues banknotes and the ...
. In September 2011 the Swiss National Bank surprised currency traders by pledging that "it will no longer tolerate a euro-franc exchange rate below the minimum rate of 1.20 francs", effectively weakening the Swiss franc. This is the biggest Swiss intervention since 1978. Despite sovereign debt having risen substantially in only a few eurozone countries, with the three most affected countries Greece, Ireland and Portugal collectively only accounting for 6% of the eurozone's gross domestic product (GDP), it became a perceived problem for the area as a whole, leading to concerns about further contagion of other European countries and a possible break-up of the eurozone. In total, the debt crisis forced five out of 17 eurozone countries to seek help from other nations by the end of 2012. In mid-2012, due to successful fiscal consolidation and implementation of structural reforms in the countries being most at risk and various policy measures taken by EU leaders and the ECB (see below), financial stability in the eurozone improved significantly and interest rates fell steadily. This also greatly diminished contagion risk for other eurozone countries. only 3 out of 17 eurozone countries, namely Greece, Portugal, and Cyprus still battled with long-term interest rates above 6%. By early January 2013, successful sovereign debt auctions across the eurozone but most importantly in Ireland, Spain, and Portugal, showed investors' confidence in the ECB backstop. In November 2013 ECB lowered its
bank rate Bank rate, also known as discount rate in American English, is the rate of interest which a central bank charges on its loans and advances to a commercial bank. The bank rate is known by a number of different terms depending on the country, and ...
to only 0.25% to aid recovery in the eurozone. As of May 2014 only two countries (Greece and Cyprus) still needed help from third parties.


Greece

The Greek economy had fared well for much of the 20th century, with high growth rates and low public debt. By 2007 (i.e., before the global financial crisis of 2007–2008), it was still one of the fastest growing in the eurozone, with a public debt-to-GDP that did not exceed 104%, but it was associated with a large
structural deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
. As the world economy was hit by the
financial crisis of 2007–08 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
, Greece was hit especially hard because its main industries—
shipping Freight transport, also referred as ''Freight Forwarding'', is the physical process of transporting commodities and merchandise goods and cargo. The term shipping originally referred to transport by sea but in American English, it has been ...
and
tourism Tourism is travel for pleasure or business; also the theory and practice of touring (disambiguation), touring, the business of attracting, accommodating, and entertaining tourists, and the business of operating tour (disambiguation), tours. Th ...
—were especially sensitive to changes in the business cycle. The government spent heavily to keep the economy functioning and the country's debt increased accordingly. The Greek crisis was triggered by the turmoil of the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
, which led the budget deficits of several Western nations to reach or exceed 10% of GDP. In the case of Greece, the high budget deficit (which, after several corrections, had been allowed to reach 10.2% and 15.1% of GDP in 2008 and 2009, respectively) was coupled with a high public debt to GDP ratio (which, until then, was relatively stable for several years, at just above 100% of GDP, as calculated after all corrections). Thus, the country appeared to lose control of its public debt to GDP ratio, which already reached 127% of GDP in 2009. In contrast, Italy was able (despite the crisis) to keep its 2009 budget deficit at 5.1% of GDP, which was crucial, given that it had a public debt to GDP ratio comparable to Greece's. In addition, being a member of the Eurozone, Greece had essentially no autonomous monetary policy flexibility. Finally, there was an effect of controversies about Greek statistics (due the aforementioned drastic budget deficit revisions which led to an increase in the calculated value of the Greek public debt by about 10%, a public debt-to-GDP ratio of about 100% until 2007), while there have been arguments about a possible effect of media reports. Consequently, Greece was "punished" by the markets which increased borrowing rates, making it impossible for the country to finance its debt since early 2010. Despite the drastic upwards revision of the forecast for the 2009 budget deficit in October 2009, Greek borrowing rates initially rose rather slowly. By April 2010 it was apparent that the country was becoming unable to borrow from the markets; on 23 April 2010, the Greek government requested an initial loan of from the EU and
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF) to cover its financial needs for the remaining part of 2010. A few days later
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
slashed Greece's sovereign debt rating to BB+ or " junk" status amid fears of default, in which case investors were liable to lose 30–50% of their money.
Stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, ...
s worldwide and the euro currency declined in response to the downgrade. On 1 May 2010, the Greek government announced a series of
austerity Austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spend ...
measures (the third austerity package within months) to secure a three-year loan ( First Economic Adjustment Programme). This was met with great anger by some Greeks, leading to massive protests, riots, and social unrest throughout Greece. The
Troika Troika or troyka (from Russian тройка, meaning 'a set of three') may refer to: Cultural tradition * Troika (driving), a traditional Russian harness driving combination, a cultural icon of Russia * Troika (dance), a Russian folk dance Pol ...
, a tripartite committee formed by the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
, the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
and the International Monetary Fund (EC, ECB and IMF), offered Greece a second bailout loan worth in October 2011 ( Second Economic Adjustment Programme), but with the activation being conditional on implementation of further austerity measures and a debt restructure agreement. Surprisingly, the Greek prime minister George Papandreou first answered that call by announcing a December 2011 referendum on the new bailout plan, but had to back down amidst strong pressure from EU partners, who threatened to withhold an overdue loan payment that Greece needed by mid-December. On 10 November 2011, Papandreou resigned following an agreement with the New Democracy party and the
Popular Orthodox Rally The Popular Orthodox Rally or People's Orthodox Alarm ( Greek: Λαϊκός Ορθόδοξος Συναγερμός, ''Laikós Orthódoxos Synagermós''), often abbreviated to LAOS (ΛΑ.Ο.Σ.) as a pun on the Greek word for ''people'', is a G ...
to appoint non-MP technocrat Lucas Papademos as new prime minister of an interim national union government, with responsibility for implementing the needed austerity measures to pave the way for the second bailout loan. All the implemented austerity measures have helped Greece bring down its primary deficit—i.e., fiscal deficit before interest payments—from €24.7bn (10.6% of GDP) in 2009 to just €5.2bn (2.4% of GDP) in 2011, but as a side-effect they also contributed to a worsening of the Greek recession, which began in October 2008 and only became worse in 2010 and 2011. The Greek GDP had its worst decline in 2011 with −6.9%, a year where the seasonal adjusted industrial output ended 28.4% lower than in 2005, and with 111,000 Greek companies going bankrupt (27% higher than in 2010). As a result, Greeks have lost about 40% of their purchasing power since the start of the crisis, they spend 40% less on goods and services, and the seasonal adjusted unemployment rate grew from 7.5% in September 2008 to a record high of 27.9% in June 2013, while the
youth unemployment Youth unemployment is the situation of young people who are looking for a job but cannot find a job, with the age range being defined by the United Nations as 15–24 years old. An unemployed person is defined as someone who does not have a job ...
rate rose from 22.0% to as high as 62%. Youth unemployment ratio hit 16.1 per cent in 2012. Overall the share of the population living at "risk of poverty or social exclusion" did not increase notably during the first two years of the crisis. The figure was measured to 27.6% in 2009 and 27.7% in 2010 (only being slightly worse than the EU27-average at 23.4%), but for 2011 the figure was now estimated to have risen sharply above 33%. In February 2012, an IMF official negotiating Greek austerity measures admitted that excessive spending cuts were harming Greece. The IMF predicted the Greek economy to contract by 5.5% by 2014. Harsh austerity measures led to an actual contraction after six years of recession of 17%. Some economic experts argue that the best option for Greece, and the rest of the EU, would be to engineer an "orderly default", allowing Athens to withdraw simultaneously from the eurozone and reintroduce its national currency the drachma at a debased rate. If Greece were to leave the euro, the economic and political consequences would be devastating. According to Japanese financial company Nomura an exit would lead to a 60%
devaluation In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national curre ...
of the new drachma. Analysts at French bank
BNP Paribas BNP Paribas is a French international banking group, founded in 2000 from the merger between Banque Nationale de Paris (BNP, "National Bank of Paris") and Paribas, formerly known as the Banque de Paris et des Pays-Bas. The full name of the grou ...
added that the fallout from a Greek exit would wipe 20% off Greece's GDP, increase Greece's debt-to-GDP ratio to over 200%, and send inflation soaring to 40–50%. Also
UBS UBS Group AG is a multinational investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres as the largest Swi ...
warned of
hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
, a
bank run A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...
and even "
military coup A military, also known collectively as armed forces, is a heavily armed, highly organized force primarily intended for warfare. It is typically authorized and maintained by a sovereign state, with its members identifiable by their distinct ...
s and possible civil war that could afflict a departing country". Eurozone National Central Banks (NCBs) may lose up to €100bn in debt claims against the Greek national bank through the ECB's TARGET2 system. The
Deutsche Bundesbank The Deutsche Bundesbank (), literally "German Federal Bank", is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks (ESCB). Due to its strength and former size, the Bundesbank is the most ...
alone may have to write off €27bn. To prevent this from happening, the Troika (EC, IMF and ECB) eventually agreed in February 2012 to provide a second bailout package worth , conditional on the implementation of another harsh austerity package that would reduce Greek expenditure by €3.3bn in 2012 and another €10bn in 2013 and 2014. Then, in March 2012, the Greek government did finally default on parts of its debt - as there was a new law passed by the government so that private holders of Greek government bonds (banks, insurers and investment funds) would "voluntarily" accept a bond swap with a 53.5% nominal write-off, partly in short-term EFSF notes, partly in new Greek bonds with lower interest rates and the maturity prolonged to 11–30 years (independently of the previous maturity). This counted as a "credit event" and holders of credit default swaps were paid accordingly. It was the world's biggest debt restructuring deal ever done, affecting some of Greek government bonds. The debt write-off had a size of , and caused the Greek debt level to temporarily fall from roughly €350bn to €240bn in March 2012 (it would subsequently rise again, due to the resulting bank recapitalization needs), with improved predictions about the debt burden. In December 2012, the Greek government bought back €21 billion ($27 billion) of their bonds for 33 cents on the euro. Critics such as the director of LSE's Hellenic Observatory argue that the billions of taxpayer euros are not saving Greece but financial institutions. Of all €252bn in bailouts between 2010 and 2015, just 10% has found its way into financing continued public deficit spending on the Greek government accounts. Much of the rest went straight into refinancing the old stock of Greek government debt (originating mainly from the high general government deficits being run in previous years), which was mainly held by private banks and hedge funds by the end of 2009. According to LSE, "more than 80 % of the rescue package" is going to refinance the expensive old maturing Greek government debt towards private creditors (mainly private banks outside Greece), replacing it with new debt to public creditors on more favourable terms, that is to say paying out their private creditors with new debt issued by its new group of public creditors known as the Troika. The shift in liabilities from European banks to European taxpayers has been staggering. One study found that the public debt of Greece to foreign governments, including debt to the EU/IMF loan facility and debt through the Eurosystem, increased from €47.8bn to €180.5bn (+132,7bn) between January 2010 and September 2011, while the combined exposure of foreign banks to (public and private) Greek entities was reduced from well over €200bn in 2009 to around €80bn (−120bn) by mid-February 2012. , 78% of Greek debt is owed to public sector institutions, primarily the EU. According to a study by the
European School of Management and Technology The European School of Management and Technology, also known as ESMT Berlin, is a private non-profit business school based in Berlin, Germany. The business school was founded in 2002 by 25 global companies and institutions including McKinsey & Co ...
only €9.7bn or less than 5% of the first two bailout programs went to the Greek fiscal budget, while most of the money went to French and German banks. (In June 2010, France's and Germany's foreign claims vis-a-vis Greece were $57bn and $31bn respectively. German banks owned $60bn of Greek, Portuguese, Irish and Spanish government debt and $151bn of banks' debt of these countries.) According to a leaked document, dated May 2010, the IMF was fully aware of the fact that the Greek bailout program was aimed at rescuing the private European banks – mainly from France and Germany. A number of IMF Executive Board members from India, Brazil, Argentina, Russia, and Switzerland criticized this in an internal memorandum, pointing out that Greek debt would be unsustainable. However their French, German and Dutch colleagues refused to reduce the Greek debt or to make (their) private banks pay. Mid May 2012, the crisis and impossibility to form a new government after elections and the possible victory by the anti-austerity axis led to new speculations Greece would have to leave the eurozone shortly. This phenomenon became known as "Grexit" and started to govern international market behaviour.Hubbard, Glenn and Tim Kane. (2013). ''Balance: The Economics of Great Powers From Ancient Rome to Modern America''. Simon & Schuster. P. 204. The centre-right's narrow victory in 17 June election gave hope that Greece would honour its obligations and stay in the Euro-zone. Due to a delayed reform schedule and a worsened economic recession, the new government immediately asked the Troika to be granted an extended deadline from 2015 to 2017 before being required to restore the budget into a self-financed situation; which in effect was equal to a request of a third bailout package for 2015–16 worth €32.6bn of extra loans. On 11 November 2012, facing a default by the end of November, the Greek parliament passed a new austerity package worth €18.8bn, including a "labour market reform" and "mid term fiscal plan 2013–16". In return, the Eurogroup agreed on the following day to lower interest rates and prolong debt maturities and to provide Greece with additional funds of around €10bn for a debt-buy-back programme. The latter allowed Greece to retire about half of the in debt that Athens owes private creditors, thereby shaving roughly off that debt. This should bring Greece's debt-to-GDP ratio down to 124% by 2020 and well below 110% two years later. Without agreement the debt-to-GDP ratio would have risen to 188% in 2013. The ''
Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
'' special report on the future of the European Union argues that the liberalisation of labour markets has allowed Greece to narrow the cost-competitiveness gap with other southern eurozone countries by approximately 50% over the past two years. This has been achieved primary through wage reductions, though businesses have reacted positively. The opening of product and service markets is proving tough because interest groups are slowing reforms. The biggest challenge for Greece is to overhaul the tax administration with a significant part of annually assessed taxes not paid. Poul Thomsen, the IMF official who heads the bailout mission in Greece, stated that "in structural terms, Greece is more than halfway there". In June 2013, Equity index provider
MSCI MSCI Inc. is an American finance company headquartered in New York City. MSCI is a global provider of equity, fixed income, real estate indexes, multi-asset portfolio analysis tools, ESG and climate products. It operates the MSCI World, MSCI ...
reclassified Greece as an emerging market, citing failure to qualify on several criteria for market accessibility. Both of the latest bailout programme audit reports, released independently by the European Commission and IMF in June 2014, revealed that even after transfer of the scheduled bailout funds and full implementation of the agreed adjustment package in 2012, there was a new forecast financing gap of: ''€5.6bn in 2014, €12.3bn in 2015, and €0bn in 2016''. The new forecast financing gaps will need either to be covered by the government's additional lending from private capital markets, or to be countered by additional fiscal improvements through expenditure reductions, revenue hikes or increased amount of privatizations. Due to an improved outlook for the Greek economy, with return of a government structural surplus in 2012, return of real GDP growth in 2014, and a decline of the unemployment rate in 2015, it was possible for the Greek government to return to the bond market during the course of 2014, for the purpose of fully funding its new extra financing gaps with additional private capital. A total of €6.1bn was received from the sale of three-year and five-year bonds in 2014, and the Greek government now plans to cover its forecast financing gap for 2015 with additional sales of seven-year and ten-year bonds in 2015. The latest recalculation of the seasonally adjusted quarterly GDP figures for the Greek economy revealed that it had been hit by three distinct recessions in the turmoil of the
Global Financial Crisis Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...
: * Q3-2007 until Q4-2007 (duration = 2 quarters) * Q2-2008 until Q1-2009 (duration = 4 quarters, referred to as being part of the
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
)
* Q3-2009 until Q4-2013 (duration = 18 quarters, referred to as being part of the eurozone crisis) Greece experienced positive economic growth in each of the three first quarters of 2014. The return of economic growth, along with the now existing underlying structural budget surplus of the general government, build the basis for the debt-to-GDP ratio to start a significant decline in the coming years ahead, which will help ensure that Greece will be labelled "debt sustainable" and fully regain complete access to private lending markets in 2015. While the ''Greek government-debt crisis'' hereby is forecast officially to end in 2015, many of its negative repercussions (e.g. a high unemployment rate) are forecast still to be felt during many of the subsequent years. During the second half of 2014, the Greek government again negotiated with the Troika. The negotiations were this time about how to comply with the programme requirements, to ensure activation of the payment of its last scheduled eurozone bailout tranche in December 2014, and about a potential update of its remaining bailout programme for 2015–16. When calculating the impact of the 2015 fiscal budget presented by the Greek government, there was a disagreement, with the calculations of the Greek government showing it fully complied with the goals of its agreed ''"Midterm fiscal plan 2013–16"'', while the Troika calculations were less optimistic and returned a not covered financing gap at €2.5bn (being required to be covered by additional austerity measures). As the Greek government insisted their calculations were more accurate than those presented by the Troika, they submitted an unchanged fiscal budget bill on 21 November, to be voted for by the parliament on 7 December. The
Eurogroup The Eurogroup is the recognised collective term for the informal meetings of the finance ministers of the eurozone—those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 membe ...
was scheduled to meet and discuss the updated review of the Greek bailout programme on 8 December (to be published on the same day), and the potential adjustments to the remaining programme for 2015–16. There were rumours in the press that the Greek government has proposed immediately to end the previously agreed and continuing IMF bailout programme for 2015–16, replacing it with the transfer of €11bn unused bank recapitalization funds currently held as reserve by the Hellenic Financial Stability Fund (HFSF), along with establishment of a new precautionary Enhanced Conditions Credit Line (ECCL) issued by the
European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It ...
. The ECCL instrument is often used as a follow-up precautionary measure, when a state has exited its sovereign bailout programme, with transfers only taking place if adverse financial/economic circumstances materialize, but with the positive effect that it help calm down financial markets as the presence of this extra backup guarantee mechanism makes the environment safer for investors. The positive economic outlook for Greece—based on the return of seasonally adjusted real GDP growth across the first three quarters of 2014—was replaced by a new fourth recession starting in Q4-2014. This new fourth recession was widely assessed as being direct related to the premature snap parliamentary election called by the Greek parliament in December 2014 and the following formation of a
Syriza The Coalition of the Radical Left – Progressive Alliance ( el, Συνασπισμός Ριζοσπαστικής Αριστεράς – Προοδευτική Συμμαχία, Synaspismós Rizospastikís Aristerás – Proodeftikí Simachía), ...
-led government refusing to accept respecting the terms of its current bailout agreement. The rising political uncertainty of what would follow caused the Troika to suspend all scheduled remaining aid to Greece under its second programme, until such time as the Greek government either accepted the previously negotiated conditional payment terms or alternatively could reach a mutually accepted agreement of some new updated terms with its public creditors. This rift caused a renewed increasingly growing liquidity crisis (both for the Greek government and Greek financial system), resulting in plummeting stock prices at the
Athens Stock Exchange The Athens Stock Exchange (ASE or ATHEX; el, Χρηματιστήριο Αθηνών (Χ.Α.), ''Chrimatistírio Athinón'') is the stock exchange of Greece, based in the capital city of Athens. It was founded in 1876. There are currently five ...
while interest rates for the Greek government at the private lending market spiked to levels once again making it inaccessible as an alternative funding source. Faced by the threat of a sovereign default and potential resulting exit of the eurozone, some final attempts were made by the Greek government in May 2015 to settle an agreement with the Troika about some adjusted terms for Greece to comply with in order to activate the transfer of the frozen bailout funds in its second programme. In the process, the Eurogroup granted a six-month technical extension of its second bailout programme to Greece. On 5 July 2015, the citizens of Greece voted decisively (a 61% to 39% decision with 62.5% voter turnout) to reject a referendum that would have given Greece more bailout help from other EU members in return for increased austerity measures. As a result of this vote, Greece's finance minister
Yanis Varoufakis Ioannis "Yanis" Varoufakis ( el, Ιωάννης Γεωργίου "Γιάνης" Βαρουφάκης, Ioánnis Georgíou "Giánis" Varoufákis, ; born 24 March 1961) is a Greek economist and politician. A former academic, he served as the Gree ...
stepped down on 6 July. Greece was the first developed country not to make a payment to the IMF on time, in 2015 (payment was made with a 20-day delay). Eventually, Greece agreed on a third bailout package in August 2015. Between 2009 and 2017 the Greek government debt rose from €300 bn to €318 bn, i.e. by only about 6% (thanks, in part, to the 2012 debt restructuring); however, during the same period, the critical debt-to-GDP ratio shot up from 127% to 179% basically due to the severe GDP drop during the handling of the crisis. Greece's bailouts successfully ended (as declared) on 20 August 2018.


Ireland

The Irish sovereign debt crisis arose not from government over-spending, but from the state guaranteeing the six main Irish-based banks who had financed a property bubble. On 29 September 2008, Finance Minister
Brian Lenihan Jnr Brian Joseph Lenihan (21 May 1959 – 10 June 2011) was an Irish Fianna Fáil politician who served as Minister for Finance from 2008 to 2011, Deputy Leader of Fianna Fáil from March 2011 to June 2011, Minister for Justice, Equality and Law ...
issued a two-year guarantee to the banks' depositors and bondholders. The guarantees were subsequently renewed for new deposits and bonds in a slightly different manner. In 2009, a
National Asset Management Agency The National Asset Management Agency (NAMA; ga, Gníomhaireacht Náisiúnta um Bhainistíocht Sócmhainní) is a body created by the government of Ireland in late 2009 in response to the Irish financial crisis and the deflation of the Irish ...
(NAMA) was created to acquire large property-related loans from the six banks at a market-related "long-term economic value". Irish banks had lost an estimated 100 billion euros, much of it related to defaulted loans to property developers and homeowners made in the midst of the property bubble, which burst around 2007. The economy collapsed during 2008. Unemployment rose from 4% in 2006 to 14% by 2010, while the national budget went from a surplus in 2007 to a deficit of 32% GDP in 2010, the highest in the history of the eurozone, despite austerity measures. With Ireland's credit rating falling rapidly in the face of mounting estimates of the banking losses, guaranteed depositors and bondholders cashed in during 2009–10, and especially after August 2010. (The necessary funds were borrowed from the central bank.) With yields on Irish Government debt rising rapidly, it was clear that the Government would have to seek assistance from the EU and IMF, resulting in a "bailout" agreement of 29 November 2010. Together with additional coming from Ireland's own reserves and pensions, the government received , of which up to was to be used to support the country's failing financial sector (only about half of this was used in that way following stress tests conducted in 2011). In return the government agreed to reduce its budget deficit to below three per cent by 2015. In April 2011, despite all the measures taken,
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
downgraded the banks' debt to
junk status In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events ...
. In July 2011, European leaders agreed to cut the interest rate that Ireland was paying on its EU/IMF bailout loan from around 6% to between 3.5% and 4% and to double the loan time to 15 years. The move was expected to save the country between 600 and 700 million euros per year. On 14 September 2011, in a move to further ease Ireland's difficult financial situation, the European Commission announced it would cut the interest rate on its loan coming from the European Financial Stability Mechanism, down to 2.59 per cent—which is the interest rate the EU itself pays to borrow from financial markets. The Euro Plus Monitor report from November 2011 attests to Ireland's vast progress in dealing with its financial crisis, expecting the country to stand on its own feet again and finance itself without any external support from the second half of 2012 onwards. According to the Centre for Economics and Business Research Ireland's export-led recovery "will gradually pull its economy out of its trough". As a result of the improved economic outlook, the cost of 10-year government bonds has fallen from its record high at 12% in mid July 2011 to below 4% in 2013 (see the graph "Long-term Interest Rates"). On 26 July 2012, for the first time since September 2010, Ireland was able to return to the financial markets, selling over €5 billion in long-term government debt, with an interest rate of 5.9% for the 5-year bonds and 6.1% for the 8-year bonds at sale. In December 2013, after three years on financial life support, Ireland finally left the EU/IMF bailout programme, although it retained a debt of €22.5 billion to the IMF; in August 2014, early repayment of €15 billion was being considered, which would save the country €375 million in surcharges. Despite the end of the bailout the country's unemployment rate remains high and public sector wages are still around 20% lower than at the beginning of the crisis. Government debt reached 123.7% of GDP in 2013. On 13 March 2013, Ireland managed to regain complete lending access on financial markets, when it successfully issued €5bn of 10-year maturity bonds at a yield of 4.3%. Ireland ended its bailout programme as scheduled in December 2013, without any need for additional financial support.


Portugal

Unlike other European countries that were also severely hit by the Great Recession in the late 2000s and eventually received bailouts in the early 2010s (such as
Greece Greece,, or , romanized: ', officially the Hellenic Republic, is a country in Southeast Europe. It is situated on the southern tip of the Balkans, and is located at the crossroads of Europe, Asia, and Africa. Greece shares land borders wi ...
and
Ireland Ireland ( ; ga, Éire ; Ulster-Scots: ) is an island in the North Atlantic Ocean, in north-western Europe. It is separated from Great Britain to its east by the North Channel, the Irish Sea, and St George's Channel. Ireland is the s ...
), Portugal had the characteristic that the 2000s were not marked by economic growth, but were already a period of economic crisis, marked by stagnation, two recessions (in 2002–03 and 2008–09) and government-sponsored fiscal austerity in order to reduce the budget deficit to the limits allowed by the European Union's Stability and Growth Pact. According to a report by the ''
Diário de Notícias ''Diário de Notícias'' () is a Portuguese daily newspaper published in Lisbon, Portugal. Established since 1864, the paper is considered a newspaper of record for Portugal. History and profile ''Diário de Notícias'' was first published in ...
'', Portugal had allowed considerable slippage in state-managed
public works Public works are a broad category of infrastructure projects, financed and constructed by the government, for recreational, employment, and health and safety uses in the greater community. They include public buildings ( municipal buildings, sc ...
and inflated top management and head officer bonuses and wages in the period between the
Carnation Revolution The Carnation Revolution ( pt, Revolução dos Cravos), also known as the 25 April ( pt, 25 de Abril, links=no), was a military coup by left-leaning military officers that overthrew the authoritarian Estado Novo regime on 25 April 1974 in Lisbo ...
in 1974 and 2010. Persistent and lasting recruitment policies boosted the number of redundant public servants. Risky credit, public debt creation, and European
structural and cohesion funds The European Structural and Investment Funds (ESI Funds, ESIFs) are financial tools governed by a common rulebook, set up to implement the regional policy of the European Union, as well as the structural policy pillars of the Common Agricultura ...
were mismanaged across almost four decades. When the global crisis disrupted the markets and the world economy, together with the US
subprime mortgage crisis The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the col ...
and the eurozone crisis, Portugal was one of the first economies to succumb, and was affected very deeply. In the summer of 2010,
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
Investors Service cut Portugal's
sovereign bond A government bond or sovereign bond is a form of Bond (finance), bond issued by a government to support government spending, public spending. It generally includes a commitment to pay periodic interest, called Coupon (finance), coupon payments' ...
rating, which led to an increased pressure on Portuguese government bonds. In the first half of 2011, Portugal requested a €78 billion IMF-EU bailout package in a bid to stabilise its public finances. Portugal's debt was in September 2012 forecast by the Troika to peak at around 124% of GDP in 2014, followed by a firm downward trajectory after 2014. Previously the Troika had predicted it would peak at 118.5% of GDP in 2013, so the developments proved to be a bit worse than first anticipated, but the situation was described as fully sustainable and progressing well. As a result, from the slightly worse economic circumstances, the country has been given one more year to reduce the budget deficit to a level below 3% of GDP, moving the target year from 2013 to 2014. The budget deficit for 2012 has been forecast to end at 5%. The recession in the economy is now also projected to last until 2013, with GDP declining 3% in 2012 and 1% in 2013; followed by a return to positive real growth in 2014. Unemployment rate increased to over 17% by end of 2012 but it has since decreased gradually to 10,5% as of November 2016. As part of the bailout programme, Portugal was required to regain complete access to financial markets by September 2013. The first step towards this target was successfully taken on 3 October 2012, when the country managed to regain partial market access by selling a bond series with 3-year maturity. Once Portugal regains complete market access, measured as the moment it successfully manage to sell a bond series with a full 10-year maturity, it is expected to benefit from interventions by the ECB, which announced readiness to implement extended support in the form of some yield-lowering bond purchases ( OMTs), aiming to bring governmental interest rates down to sustainable levels. A peak for the Portuguese 10-year governmental interest rates happened on 30 January 2012, where it reached 17.3% after the rating agencies had cut the governments credit rating to "non-investment grade" (also referred to as "junk"). As of December 2012, it has been more than halved to only 7%. A successful return to the long-term lending market was made by the issuing of a 5-year maturity bond series in January 2013, and the state regained complete lending access when it successfully issued a 10-year maturity bond series on 7 May 2013. According to the ''
Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
'' special report on the future of the
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
, the Portuguese government has "made progress in reforming labour legislation, cutting previously generous redundancy payments by more than half and freeing smaller employers from collective bargaining obligations, all components of Portugal's €78 billion bailout program". Additionally, unit labour costs have fallen since 2009, working practices are liberalizing, and industrial licensing is being streamlined. On 18 May 2014, Portugal left the EU bailout mechanism without additional need for support, as it had already regained a complete access to lending markets back in May 2013, and with its latest issuing of a 10-year government bond being successfully completed with a rate as low as 3.59%. Portugal still has many tough years ahead. During the crisis, Portugal's government debt increased from 93 to 139 percent of GDP. On 3 August 2014,
Banco de Portugal The Banco de Portugal (English: Bank of Portugal) is the central bank of the Portuguese Republic. The bank was founded by royal charter in 1846, during the reign of Queen Maria II of Portugal, by a merger of the '' Banco de Lisboa'' (Bank of Lis ...
announced the country's second biggest bank
Banco Espírito Santo Banco Espírito Santo (BES) was a Portuguese bank based in Lisbon that on 4 August 2014 was split in two banks: Novo Banco, which kept its healthy operations, and a "bad bank" to keep its toxic assets. It once was the second-largest listed Por ...
would be split in two after losing the equivalent of $4.8 billion in the first 6 months of 2014, sending its shares down by 89 percent.


Spain

Spain had a comparatively low debt level among advanced economies prior to the crisis. Its public debt relative to GDP in 2010 was only 60%, more than 20 points less than Germany, France or the US, and more than 60 points less than Italy or Greece. Debt was largely avoided by the ballooning tax revenue from the housing bubble, which helped accommodate a decade of increased government spending without debt accumulation. When the bubble burst, Spain spent large amounts of money on bank bailouts. In May 2012,
Bankia Bankia () was a Spanish financial services company that was formed in December 2010, consolidating the operations of seven regional savings banks, and was partially nationalized by the government of Spain in May 2012 due to the near collapse of ...
received a 19 billion euro bailout, on top of the previous 4.5 billion euros to prop up Bankia. Questionable accounting methods disguised bank losses. During September 2012, regulators indicated that Spanish banks required €59 billion (US$77 billion) in additional capital to offset losses from real estate investments. The bank bailouts and the economic downturn increased the country's deficit and debt levels and led to a substantial downgrading of its credit rating. To build up trust in the financial markets, the government began to introduce austerity measures and in 2011 it passed a law in congress to approve an amendment to the
Spanish Constitution The Spanish Constitution (Spanish, Asturleonese, and gl, Constitución Española; eu, Espainiako Konstituzioa; ca, Constitució Espanyola; oc, Constitucion espanhòla) is the democratic law that is supreme in the Kingdom of Spain. It was ...
to require a
balanced budget A balanced budget (particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). More generally, it is a budget that has no budget ...
at both the national and regional level by 2020. The amendment states that public debt can not exceed 60% of GDP, though exceptions would be made in case of a natural catastrophe, economic recession or other emergencies. As one of the largest eurozone economies (larger than Greece, Portugal and Ireland combined) the condition of Spain's economy is of particular concern to international observers. Under pressure from the United States, the IMF, other European countries and the European Commission the Spanish governments eventually succeeded in trimming the deficit from 11.2% of GDP in 2009 to 7.1% in 2013. Nevertheless, in June 2012,
Spain , image_flag = Bandera de España.svg , image_coat = Escudo de España (mazonado).svg , national_motto = '' Plus ultra'' (Latin)(English: "Further Beyond") , national_anthem = (English: "Royal March") , ...
became a prime concern for the Euro-zone when interest on Spain's 10-year bonds reached the 7% level and it faced difficulty in accessing bond markets. This led the Eurogroup on 9 June 2012 to grant Spain a financial support package of up to €100 billion. The funds will not go directly to Spanish banks, but be transferred to a government-owned Spanish fund responsible to conduct the needed bank recapitalisations (FROB), and thus it will be counted for as additional sovereign debt in Spain's national account. An economic forecast in June 2012 highlighted the need for the arranged bank recapitalisation support package, as the outlook promised a negative growth rate of 1.7%, unemployment rising to 25%, and a continued declining trend for housing prices. In September 2012 the ECB removed some of the pressure from Spain on financial markets, when it announced its "unlimited bond-buying plan", to be initiated if Spain would sign a new sovereign bailout package with EFSF/ESM. Strictly speaking, Spain was not hit by a sovereign debt-crisis in 2012, as the financial support package that they received from the ESM was earmarked for a bank recapitalization fund and did not include financial support for the government itself. According to the latest debt sustainability analysis published by the European Commission in October 2012, the fiscal outlook for Spain, if assuming the country will stick to the fiscal consolidation path and targets outlined by the country's current EDP programme, will result in a
debt-to-GDP ratio In economics, the debt-to-GDP ratio is the ratio between a country's government debt (measured in units of currency) and its gross domestic product (GDP) (measured in units of currency per year). While it is a "ratio", it is technically measured ...
reaching its maximum at 110% in 2018—followed by a declining trend in subsequent years. In regards of the
structural deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
the same outlook has promised, that it will gradually decline to comply with the maximum 0.5% level required by the
Fiscal Compact The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union; also referred to as TSCG, or more plainly the Fiscal Stability Treaty is an intergovernmental treaty introduced as a new stricter version of the Stability ...
in 2022/2027. Though Spain was suffering with 27% unemployment and the economy was shrinking 1.4% in 2013, Mariano Rajoy's conservative government has pledged to speed up reforms, according to the ''
Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and published digitally that focuses on business and economic current affairs. Based in London, England, the paper is owned by a Japanese holding company, Nik ...
'' special report on the future of the European Union. "Madrid is reviewing its labour market and pension reforms and has promised by the end of this year to liberalize its heavily regulated professions." But Spain is benefiting from improved labour cost competitiveness. "They have not lost export market share," says Eric Chaney, chief economist at
Axa Axa S.A. (styled as ''AXA'' or GIG in the Middle East) is a French multinational insurance company. The head office is in the 8th arrondissement of Paris, France. It also provides investment management and other financial services. The ...
. "If credit starts flowing again, Spain could surprise us." On 23 January 2014, as foreign investor confidence in the country has been restored, Spain formally exited the EU/IMF bailout mechanism. By end of March 2018, unemployment rate of Spain has fallen to 16.1%. and the debt is 98,30 % of the GDP


Cyprus

The economy of the small island of Cyprus with 840,000 people was hit by several huge blows in and around 2012 including, amongst other things, the €22 billion exposure of Cypriot banks to the Greek debt haircut, the downgrading of the Cypriot economy into junk status by international rating agencies and the inability of the government to refund its state expenses. On 25 June 2012, the Cypriot Government requested a bailout from the
European Financial Stability Facility The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the objectiv ...
or the
European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It ...
, citing difficulties in supporting its banking sector from the exposure to the Greek debt haircut. On 30 November the Troika (the European Commission, the International Monetary Fund, and the European Central Bank) and the Cypriot Government had agreed on the bailout terms with only the amount of money required for the bailout remaining to be agreed upon. Bailout terms include strong austerity measures, including cuts in civil service salaries, social benefits, allowances and pensions and increases in VAT, tobacco, alcohol and fuel taxes, taxes on lottery winnings, property, and higher public health care charges. At the insistence of the Commission negotiators, at first the proposal also included an unprecedented one-off levy of 6.7% for deposits up to €100,000 and 9.9% for higher deposits on all domestic bank accounts. Following public outcry, the eurozone finance ministers were forced to change the levy, excluding deposits of less than €100,000, and introducing a higher 15.6% levy on deposits of above €100,000 ($129,600)—in line with the EU minimum deposit guarantee. This revised deal was also rejected by the Cypriot parliament on 19 March 2013 with 36 votes against, 19 abstentions and one not present for the vote. The final agreement was settled on 25 March 2013, with the proposal to close the most troubled
Laiki Bank Cyprus Popular Bank (from 2006 to 2011 known as Marfin Popular Bank) was the second-largest banking group in Cyprus behind the Bank of Cyprus until it was 'shuttered' in March 2013 and split into two parts. The 'good' Cypriot part was merged i ...
, which helped significantly to reduce the needed loan amount for the overall bailout package, so that €10bn was sufficient without need for imposing a general levy on bank deposits. The final conditions for activation of the bailout package was outlined by the Troika's MoU agreement, which was endorsed in full by the Cypriot House of Representatives on 30 April 2013. It includes: # Recapitalisation of the entire financial sector while accepting a closure of the Laiki bank, # Implementation of the
anti-money laundering Money laundering is the process of concealing the origin of money, obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, by converting it into a legitimate source. It is a crime in many jurisdictio ...
framework in Cypriot financial institutions, # Fiscal consolidation to help bring down the Cypriot governmental budget deficit, # Structural reforms to restore competitiveness and macroeconomic imbalances, # Privatization programme. The Cypriot debt-to-GDP ratio is on this background now forecasted only to peak at 126% in 2015 and subsequently decline to 105% in 2020, and thus considered to remain within sustainable territory. Although the bailout support programme feature sufficient financial transfers until March 2016, Cyprus began slowly to regain its access to the private lending markets already in June 2014. At this point of time, the government sold €0.75bn of bonds with a five-year maturity, to the tune of a 4.85% yield. A continued selling of bonds with a ten-year maturity, which would equal a regain of complete access to the private lending market (and mark the end of the era with need for bailout support), is expected to happen sometime in 2015. The Cypriot minister of finance recently confirmed, that the government plan to issue two new European Medium Term Note (EMTN) bonds in 2015, likely shortly ahead of the expiry of another €1.1bn bond on 1 July and a second expiry of a €0.9bn bond on 1 November. As announced in advance, the Cypriot government issued €1bn of seven-year bonds with a 4.0% yield by the end of April 2015.


Policy reactions


EU emergency measures


European Financial Stability Facility (EFSF)

On 9 May 2010, the 27 EU member states agreed to create the European Financial Stability Facility, a legal instrument aiming at preserving financial stability in Europe, by providing financial assistance to eurozone states in difficulty. The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans to eurozone countries in financial troubles, recapitalise banks or buy sovereign debt. Emissions of bonds are backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
. The €440 billion lending capacity of the facility is jointly and severally guaranteed by the eurozone countries' governments and may be combined with loans up to €60 billion from the
European Financial Stabilisation Mechanism The European Financial Stabilisation Mechanism (EFSM) is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral. It runs un ...
(reliant on funds raised by the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
using the EU budget as collateral) and up to €250 billion from the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF) to obtain a financial safety net up to €750 billion. The EFSF issued €5 billion of five-year bonds in its inaugural benchmark issue 25 January 2011, attracting an order book of €44.5 billion. This amount is a record for any sovereign bond in Europe, and €24.5 billion more than the
European Financial Stabilisation Mechanism The European Financial Stabilisation Mechanism (EFSM) is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral. It runs un ...
(EFSM), a separate European Union funding vehicle, with a €5 billion issue in the first week of January 2011. On 29 November 2011, the member state finance ministers agreed to expand the EFSF by creating certificates that could guarantee up to 30% of new issues from troubled euro-area governments, and to create investment vehicles that would boost the EFSF's firepower to intervene in primary and secondary bond markets. The transfers of bailout funds were performed in tranches over several years and were conditional on the governments simultaneously implementing a package of fiscal consolidation, structural reforms, privatization of public assets and setting up funds for further bank recapitalization and resolution. ;Reception by financial markets Stocks surged worldwide after the EU announced the EFSF's creation. The facility eased fears that the Greek debt crisis would spread, and this led to some stocks rising to the highest level in a year or more. The euro made its biggest gain in 18 months, before falling to a new four-year low a week later. Shortly after the euro rose again as hedge funds and other short-term traders unwound short positions and carry trades in the currency. Commodity prices also rose following the announcement. The dollar
Libor The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is u ...
held at a nine-month high. Default swaps also fell. The VIX closed down a record almost 30%, after a record weekly rise the preceding week that prompted the bailout. The agreement is interpreted as allowing the ECB to start buying
government debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
from the
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the ...
, which is expected to reduce bond yields. As a result, Greek bond yields fell sharply from over 10% to just over 5%. Asian bonds yields also fell with the EU bailout.) ;Usage of EFSF funds The EFSF only raises funds after an aid request is made by a country. As of the end of July 2012, it has been activated various times. In November 2010, it financed of the total rescue package for Ireland (the rest was loaned from individual European countries, the European Commission and the IMF). In May 2011 it contributed one-third of the €78 billion package for Portugal. As part of the second bailout for Greece, the loan was shifted to the EFSF, amounting to (130bn new package plus 34.4bn remaining from Greek Loan Facility) throughout 2014. On 20 July 2012, European finance ministers sanctioned the first tranche of a partial bailout worth up to €100 billion for Spanish banks. This leaves the EFSF with or an equivalent of in leveraged firepower. The EFSF is set to expire in 2013, running some months parallel to the permanent rescue funding program called the
European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It ...
(ESM), which will start operating as soon as member states representing 90% of the capital commitments have ratified it. (see section: ESM) On 13 January 2012,
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
downgraded France and Austria from AAA rating, lowered Spain, Italy (and five otherGibson, Kate
"S&P takes Europe's rescue fund down a notch"
''MarketWatch'', 16 January 2012 2:37 pm EST. Retrieved 16 January 2012.
) euro members further. Shortly after, S&P also downgraded the EFSF from AAA to AA+.Standard & Poor's Ratings Services quoted at


European Financial Stabilisation Mechanism (EFSM)

On 5 January 2011, the European Union created the European Financial Stabilisation Mechanism (EFSM), an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
using the
budget of the European Union The Budget of the European Union (EU budget) is used to finance EU funding programmes (such as the European Regional Development Fund, the Cohesion Fund, Horizon Europe, or Erasmus+) and other expenditure at the European level. The EU budget ...
as collateral. It runs under the supervision of the Commission and aims at preserving financial stability in Europe by providing financial assistance to EU member states in economic difficulty. The Commission fund, backed by all 27
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
members, has the authority to raise up to and is rated AAA by Fitch,
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
and
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
. Under the EFSM, the EU successfully placed in the capital markets an issue of bonds as part of the financial support package agreed for Ireland, at a borrowing cost for the EFSM of 2.59%. Like the EFSF, the EFSM was replaced by the permanent rescue funding programme ESM, which was launched in September 2012.


Brussels agreement and aftermath

On 26 October 2011, leaders of the 17 eurozone countries met in Brussels and agreed on a 50% write-off of Greek sovereign debt held by banks, a fourfold increase (to about €1 trillion) in bail-out funds held under the
European Financial Stability Facility The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the objectiv ...
, an increased mandatory level of 9% for bank capitalisation within the EU and a set of commitments from Italy to take measures to reduce its national debt. Also pledged was in "credit enhancement" to mitigate losses likely to be suffered by European banks. José Manuel Barroso characterised the package as a set of "exceptional measures for exceptional times". The package's acceptance was put into doubt on 31 October when Greek Prime Minister George Papandreou announced that a
referendum A referendum (plural: referendums or less commonly referenda) is a Direct democracy, direct vote by the Constituency, electorate on a proposal, law, or political issue. This is in contrast to an issue being voted on by a Representative democr ...
would be held so that the Greek people would have the final say on the bailout, upsetting financial markets. On 3 November 2011 the promised Greek referendum on the bailout package was withdrawn by Prime Minister Papandreou. In late 2011, Landon Thomas in the ''New York Times'' noted that some, at least, European banks were maintaining high dividend payout rates and none were getting capital injections from their governments even while being required to improve capital ratios. Thomas quoted
Richard Koo Richard C. Koo ( ja, リチャード・クー, ; ; born 1954) is a Taiwanese-American economist living in Japan specializing in balance sheet recessions. He is Chief Economist at the Nomura Research Institute. Early life and education Koo was b ...
, an economist based in Japan, an expert on that country's banking crisis, and specialist in balance sheet recessions, as saying:
I do not think Europeans understand the implications of a systemic banking crisis. ... When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession—if not depression. ... Government intervention should be the first resort, not the last resort.
Beyond
equity issuance In financial markets, an equity issuance is the sale of new equity or stock by a firm to investors. Equity issuance can involve a private sale, in which the transaction between investors and the firm takes place directly, or publicly, in which ...
and debt-to-equity conversion, then, one analyst "said that as banks find it more difficult to raise funds, they will move faster to cut down on loans and unload lagging assets" as they work to improve capital ratios. This latter contraction of balance sheets "could lead to a depression", the analyst said. Reduced lending was a circumstance already at the time being seen in a "deepen ngcrisis" in
commodities In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. The price of a co ...
trade finance Trade finance is a phrase used to describe different strategies that are employed to make international trade easier. It signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction require ...
in western Europe. ;Final agreement on the second bailout package In a marathon meeting on 20/21 February 2012 the Eurogroup agreed with the IMF and the
Institute of International Finance An institute is an organisational body created for a certain purpose. They are often research organisations (research institutes) created to do research on specific topics, or can also be a professional body. In some countries, institutes can ...
on the final conditions of the second bailout package worth €130 billion. The lenders agreed to increase the nominal haircut from 50% to 53.5%. EU Member States agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility to a level of just 150 basis points above Euribor. Furthermore, governments of Member States where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income until 2020. Altogether this should bring down Greece's debt to between 117% and 120.5% of GDP by 2020.


European Central Bank

The
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
(ECB) has taken a series of measures aimed at reducing volatility in the financial markets and at improving liquidity. In May 2010 it took the following actions: * It began open market operations buying government and private debt securities, reaching in February 2012, though it simultaneously absorbed the same amount of liquidity to prevent a rise in inflation. According to
Rabobank Rabobank (; full name: ''Coöperatieve Rabobank U.A.'') is a Dutch multinational banking and financial services company headquartered in Utrecht, Netherlands. The group comprises 89 local Dutch Rabobanks (2019), a central organisation (Raboban ...
economist Elwin de Groot, there is a "natural limit" of the ECB can sterilise. * It reactivated the dollar swap lines with
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
support. * It changed its policy regarding the necessary credit rating for loan deposits, accepting as collateral all outstanding and new debt instruments issued or guaranteed by the Greek government, regardless of the nation's credit rating. The move took some pressure off Greek government bonds, which had just been downgraded to junk status, making it difficult for the government to raise money on capital markets. On 30 November 2011, the ECB, the US
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, the
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
s of
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by to ...
,
Japan Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the n ...
,
Britain Britain most often refers to: * The United Kingdom, a sovereign state in Europe comprising the island of Great Britain, the north-eastern part of the island of Ireland and many smaller islands * Great Britain, the largest island in the United King ...
and the Swiss National Bank provided global financial markets with additional liquidity to ward off the debt crisis and to support the real economy. The central banks agreed to lower the cost of dollar
currency swap In finance, a currency swap (more typically termed a cross-currency swap, XCS) is an interest rate derivative (IRD). In particular it is a linear IRD, and one of the most liquid benchmark products spanning multiple currencies simultaneously. ...
s by 50 basis points to come into effect on 5 December 2011. They also agreed to provide each other with abundant liquidity to make sure that commercial banks stay liquid in other currencies. With the aim of boosting the recovery in the eurozone economy by lowering interest rates for businesses, the ECB cut its
bank rate Bank rate, also known as discount rate in American English, is the rate of interest which a central bank charges on its loans and advances to a commercial bank. The bank rate is known by a number of different terms depending on the country, and ...
s in multiple steps in 2012–2013, reaching an historic low of 0.25% in November 2013. The lowered borrowing rates have also caused the euro to fall in relation to other currencies, which is hoped will boost exports from the eurozone and further aid the recovery. With inflation falling to 0.5% in May 2014, the ECB again took measures to stimulate the eurozone economy, which grew at just 0.2% during the first quarter of 2014. (Deflation or very low inflation encourages holding cash, causing a decrease in purchases.) On 5 June, the central bank cut the prime interest rate to 0.15%, and set the deposit rate at −0.10%. The latter move in particular was seen as "a bold and unusual move", as a negative interest rate had never been tried on a wide-scale before. Additionally, the ECB announced it would offer long-term four-year loans at the cheap rate (normally the rate is primarily for overnight lending), but only if the borrowing banks met strict conditions designed to ensure the funds ended up in the hands of businesses instead of, for example, being used to buy low risk government bonds. Collectively, the moves are aimed at avoiding
deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
, devaluing the euro to make exportation more viable, and at increasing "real world" lending. Stock markets reacted strongly to the ECB rate cuts. The German DAX index, for example, set a record high the day the new rates were announced. Meanwhile, the euro briefly fell to a four-month low against the dollar. However, due to the unprecedented nature of the negative interest rate, the long-term effects of the stimulus measures are hard to predict. Bank president Mario Draghi signalled the central bank was willing to do whatever it takes to turn around the eurozone economies, remarking "Are we finished? The answer is no." He laid the groundwork for large-scale bond repurchasing, a controversial idea known as
quantitative easing Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
. ;Resignations In September 2011,
Jürgen Stark Jürgen Stark (born 31 May 1948 in Gau-Odernheim, Germany) is a German economist who served as a member of the Executive Board of the European Central Bank from 2006 to 2011 and concurrently as ECB chief economist. Within the Executive Board, he ...
became the second German after Axel A. Weber to resign from the ECB Governing Council in 2011. Weber, the former
Deutsche Bundesbank The Deutsche Bundesbank (), literally "German Federal Bank", is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks (ESCB). Due to its strength and former size, the Bundesbank is the most ...
president, was once thought to be a likely successor to
Jean-Claude Trichet Jean-Claude Trichet (; born 20 December 1942) is a French economist who served as President of the European Central Bank from 2003 to 2011. Previous to his assumption of the presidency he served as Governor of the Bank of France from 1993 to 2003 ...
as bank president. He and Stark were both thought to have resigned due to "unhappiness with the ECB's bond purchases, which critics say erode the bank's independence". Stark was "probably the most hawkish" member of the council when he resigned. Weber was replaced by his Bundesbank successor
Jens Weidmann Jens Weidmann (born 20 April 1968) is a German economist who served as president of the Deutsche Bundesbank between 2011 and 2021. He also served as chairman of the Board of the Bank for International Settlements. Before moving to the Bundesbank, ...
, while Belgium's
Peter Praet Peter Praet (born 20 January 1949 in Herchen near Eitorf, North Rhine-Westphalia, Allied-occupied Germany) is a Belgian economist who served as a member of the Executive Board of the European Central Bank from 2011 to 2019 and concurrently as EC ...
took Stark's original position, heading the ECB's economics department. ;Long Term Refinancing Operation (LTRO) On 22 December 2011, the ECB started the biggest infusion of credit into the European banking system in the euro's 13-year history. Under its Long Term Refinancing Operations (LTROs) it loaned to 523 banks for an exceptionally long period of three years at a rate of just one per cent. Previous refinancing operations matured after three, six, and twelve months. The by far biggest amount of was tapped by banks in Greece, Ireland, Italy and Spain. This way the ECB tried to make sure that banks have enough cash to pay off their own maturing debts in the first three months of 2012, and at the same time keep operating and loaning to businesses so that a credit crunch does not choke off economic growth. It also hoped that banks would use some of the money to buy government bonds, effectively easing the debt crisis. On 29 February 2012, the ECB held a second auction, LTRO2, providing 800 eurozone banks with further in cheap loans. Net new borrowing under the €529.5 billion February auction was around €313 billion; out of a total of €256 billion existing ECB lending (MRO + 3m&6m LTROs), €215 billion was rolled into LTRO2. ECB lending has largely replaced inter-bank lending. Spain has €365 billion and Italy has €281 billion of borrowings from the ECB (June 2012 data). Germany has €275 billion on deposit. ;Reorganization of the European banking system On 16 June 2012 the European Central Bank together with other European leaders hammered out plans for the ECB to become a bank regulator and to form a deposit insurance program to augment national programs. Other economic reforms promoting European growth and employment were also proposed. ;Outright Monetary Transactions (OMTs) On 6 September 2012, the ECB announced to offer additional financial support in the form of some yield-lowering bond purchases ( OMT), for all eurozone countries involved in a sovereign state bailout program from EFSF/ ESM. A eurozone country can benefit from the program if -and for as long as- it is found to suffer from stressed bond yields at excessive levels; but only at the point of time where the country possesses/regains a complete market access -and only if the country still complies with all terms in the signed Memorandum of Understanding (MoU) agreement. Countries receiving a precautionary programme rather than a sovereign bailout will, by definition, have complete market access and thus qualify for OMT support if also suffering from stressed interest rates on its government bonds. In regards of countries receiving a sovereign bailout (Ireland, Portugal and Greece), they will on the other hand not qualify for OMT support before they have regained complete market access, which will normally only happen after having received the last scheduled bailout disbursement. Despite none OMT programmes were ready to start in September/October, the financial markets straight away took notice of the additionally planned OMT packages from ECB, and started slowly to price-in a decline of both short-term and long-term interest rates in all European countries previously suffering from stressed and elevated interest levels (as OMTs were regarded as an extra potential back-stop to counter the frozen liquidity and highly stressed rates; and just the knowledge about their potential existence in the very near future helped to calm the markets).


European Stability Mechanism (ESM)

The European Stability Mechanism (ESM) is a permanent rescue funding programme to succeed the temporary
European Financial Stability Facility The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the eurozone to address the European sovereign-debt crisis. It was agreed by the Council of the European Union on 9 May 2010, with the objectiv ...
and
European Financial Stabilisation Mechanism The European Financial Stabilisation Mechanism (EFSM) is an emergency funding programme reliant upon funds raised on the financial markets and guaranteed by the European Commission using the budget of the European Union as collateral. It runs un ...
in July 2012 but it had to be postponed until after the Federal Constitutional Court of Germany had confirmed the legality of the measures on 12 September 2012. The permanent bailout fund entered into force for 16 signatories on 27 September 2012. It became effective in Estonia on 4 October 2012 after the completion of their ratification process. On 16 December 2010 the European Council agreed a two line amendment to the EU
Lisbon Treaty The Treaty of Lisbon (initially known as the Reform Treaty) is an international agreement that amends the two treaties which form the constitutional basis of the European Union (EU). The Treaty of Lisbon, which was signed by the EU member sta ...
to allow for a permanent bail-out mechanism to be established including stronger sanctions. In March 2011, the European Parliament approved the treaty amendment after receiving assurances that the
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
, rather than EU states, would play 'a central role' in running the ESM. The ESM is an
intergovernmental organisation An international organization or international organisation (see spelling differences), also known as an intergovernmental organization or an international institution, is a stable set of norms and rules meant to govern the behavior of states a ...
under public international law. It is located in Luxembourg. Such a mechanism serves as a "financial firewall". Instead of a default by one country rippling through the entire interconnected financial system, the firewall mechanism can ensure that downstream nations and banking systems are protected by guaranteeing some or all of their obligations. Then the single default can be managed while limiting
financial contagion Financial contagion refers to "the spread of market disturbances mostly on the downside from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows". Financial contag ...
.


European Fiscal Compact

In March 2011 a new reform of the Stability and Growth Pact was initiated, aiming at straightening the rules by adopting an automatic procedure for imposing of penalties in case of breaches of either the 3% deficit or the 60% debt rules. By the end of the year, Germany, France and some other smaller EU countries went a step further and vowed to create a
fiscal union Fiscal union is the integration of the fiscal policy of nations or states. In a fiscal union, decisions about the collection and expenditure of taxes are taken by common institutions, shared by the participating governments. A fiscal union does not ...
across the eurozone with strict and enforceable fiscal rules and automatic penalties embedded in the EU treaties. On 9 December 2011 at the
European Council The European Council (informally EUCO) is a collegiate body that defines the overall political direction and priorities of the European Union. It is composed of the heads of state or government of the EU member states, the President of the ...
meeting, all 17 members of the eurozone and six countries that aspire to join agreed on a new intergovernmental treaty to put strict caps on government spending and borrowing, with penalties for those countries who violate the limits. All other non-eurozone countries apart from the UK are also prepared to join in, subject to parliamentary vote. The treaty will enter into force on 1 January 2013, if by that time 12 members of the
euro area The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU polic ...
have ratified it. Originally EU leaders planned to change existing EU treaties but this was blocked by British prime minister
David Cameron David William Donald Cameron (born 9 October 1966) is a British former politician who served as Prime Minister of the United Kingdom from 2010 to 2016 and Leader of the Conservative Party from 2005 to 2016. He previously served as Leader o ...
, who demanded that the
City of London The City of London is a city, ceremonial county and local government district that contains the historic centre and constitutes, alongside Canary Wharf, the primary central business district (CBD) of London. It constituted most of London f ...
be excluded from future financial regulations, including the proposed EU financial transaction tax. By the end of the day, 26 countries had agreed to the plan, leaving the United Kingdom as the only country not willing to join. Cameron subsequently conceded that his action had failed to secure any safeguards for the UK. Britain's refusal to be part of the fiscal compact to safeguard the eurozone constituted a ''de facto'' refusal (PM
David Cameron David William Donald Cameron (born 9 October 1966) is a British former politician who served as Prime Minister of the United Kingdom from 2010 to 2016 and Leader of the Conservative Party from 2005 to 2016. He previously served as Leader o ...
vetoed the project) to engage in any radical revision of the
Lisbon Treaty The Treaty of Lisbon (initially known as the Reform Treaty) is an international agreement that amends the two treaties which form the constitutional basis of the European Union (EU). The Treaty of Lisbon, which was signed by the EU member sta ...
. John Rentoul of ''The Independent'' concluded that "Any Prime Minister would have done as Cameron did".


Economic reforms and recovery proposals


Direct loans to banks and banking regulation

On 28 June 2012, eurozone leaders agreed to permit loans by the European Stability Mechanism to be made directly to stressed banks rather than through eurozone states, to avoid adding to sovereign debt. The reform was linked to plans for banking regulation by the European Central Bank. The reform was immediately reflected by a reduction in yield of long-term bonds issued by member states such as Italy and Spain and a rise in value of the Euro.


Less austerity, more investment

There has been substantial criticism over the austerity measures implemented by most European nations to counter this debt crisis. US economist and Nobel laureate
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was t ...
argues that an abrupt return to "'non- Keynesian' financial policies" is not a viable solution. Pointing at historical evidence, he predicts that deflationary policies now being imposed on countries such as Greece and Spain will prolong and deepen their recessions. Together with over 9,000 signatories of ''"A Manifesto for Economic Sense"'' Krugman also dismissed the belief of austerity focusing policy makers such as EU economic commissioner
Olli Rehn Olli Ilmari Rehn (; born 31 March 1962) is a Finnish economist and public official who has been serving as governor of the Bank of Finland since 2018. A member of the Centre Party, he previously served as the European Commissioner for Enlargeme ...
and most European finance ministers that "budget consolidation" revives confidence in financial markets over the longer haul. In a 2003 study that analysed 133 IMF austerity programmes, the IMF's independent evaluation office found that policy makers consistently underestimated the disastrous effects of rigid spending cuts on economic growth. In early 2012 an IMF official, who negotiated Greek austerity measures, admitted that spending cuts were harming Greece. In October 2012, the IMF said that its forecasts for countries which implemented
austerity Austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spend ...
programmes have been consistently overoptimistic, suggesting that tax hikes and spending cuts have been doing more damage than expected, and countries which implemented
fiscal stimulus In economics, stimulus refers to attempts to use monetary policy or fiscal policy (or stabilization policy in general) to stimulate the economy. Stimulus can also refer to monetary policies such as lowering interest rates and quantitative easin ...
, such as Germany and Austria, did better than expected.Brad Plumer (12 October 2012
"IMF: Austerity is much worse for the economy than we thought"
''The Washington Post''
Also Portugal did comparably better than Spain. The latter introduced drastic austerity measures but was unable not meet its EU budget deficit targets. On the other hand, Portugal's leftist coalition fought austerity (it increased the minimum wage by 25 percent and took back cuts in the pension system and the public sector) and at the same time reduced its budget deficit to below three percent in 2016. According to historian Florian Schui from University of St. Gallen no austerity program has ever worked. Schui particularly notes
Winston Churchill Sir Winston Leonard Spencer Churchill (30 November 187424 January 1965) was a British statesman, soldier, and writer who served as Prime Minister of the United Kingdom twice, from 1940 to 1945 during the Second World War, and again from ...
's attempt in 1925 and Heinrich Brüning's attempt in 1930 during the
Weimar Republic The Weimar Republic (german: link=no, Weimarer Republik ), officially named the German Reich, was the government of Germany from 1918 to 1933, during which it was a Constitutional republic, constitutional federal republic for the first time in ...
. Both led to disastrous consequences. According to Keynesian economists "growth-friendly austerity" relies on the false argument that public cuts would be compensated for by more spending from consumers and businesses, a theoretical claim that has not materialised. The case of Greece shows that excessive levels of private indebtedness and a collapse of public confidence (over 90% of Greeks fear unemployment, poverty and the closure of businesses) led the private sector to decrease spending in an attempt to save up for rainy days ahead. This led to even lower demand for both products and labour, which further deepened the recession and made it ever more difficult to generate tax revenues and fight public indebtedness.Kapoor, Sony, and
Peter Bofinger Peter Bofinger (born September 18, 1954) is a German economist and a former member of the German Council of Economic Experts. Career Following his studies, Bofinger worked as staff member to the Council of Economic Experts between 1978 and 1981. ...

"Europe can't cut and grow"
''The Guardian'', 6 February 2012.
According to Financial Times chief economics commentator
Martin Wolf Martin Harry Wolf (born 16 August 1946 in London) is a British journalist of Austrian-Dutch descent who focuses on economics. He is the associate editor and chief economics commentator at the '' Financial Times''. Early life Wolf was born ...
, "structural tightening does deliver actual tightening. But its impact is much less than one to one. A one percentage point reduction in the structural deficit delivers a 0.67 percentage point improvement in the actual
fiscal deficit The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
." This means that Ireland e.g. would require structural fiscal tightening of more than 12% to eliminate its 2012 actual fiscal deficit. A task that is difficult to achieve without an
exogenous In a variety of contexts, exogeny or exogeneity () is the fact of an action or object originating externally. It contrasts with endogeneity or endogeny, the fact of being influenced within a system. Economics In an economic model, an exogen ...
eurozone-wide economic boom. According to the Europlus Monitor Report 2012, no country should tighten its fiscal reins by more than 2% of GDP in one year, to avoid recession. Instead of public austerity, a "growth compact" centring on tax increases and deficit spending is proposed. Since struggling European countries lack the funds to engage in
deficit spending Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
, German economist and member of the
German Council of Economic Experts The German Council of Economic Experts ( German: ') is a group of economists set up in 1963 to evaluate economic policies of the German government. In the media, the council is often referred to as the "Five Sages of Economy" (''Fünf Wirtschaftswe ...
Peter Bofinger Peter Bofinger (born September 18, 1954) is a German economist and a former member of the German Council of Economic Experts. Career Following his studies, Bofinger worked as staff member to the Council of Economic Experts between 1978 and 1981. ...
and Sony Kapoor of the global
think tank A think tank, or policy institute, is a research institute that performs research and advocacy concerning topics such as social policy, political strategy, economics, military, technology, and culture. Most think tanks are non-govern ...
Re-Define suggest providing in additional funds to the
European Investment Bank The European Investment Bank (EIB) is the European Union's investment bank and is owned by the EU Member States. It is one of the largest supranational lenders in the world. The EIB finances and invests both through equity and debt solution ...
(EIB), which could then lend ten times that amount to the employment-intensive smaller business sector. The EU is currently planning a possible increase in the EIB's capital base. Furthermore, the two suggest financing additional public investments by growth-friendly taxes on "property, land, wealth, carbon emissions and the under-taxed financial sector". They also called on EU countries to renegotiate the EU savings tax directive and to sign an agreement to help each other crack down on tax evasion and avoidance. Currently authorities capture less than 1% in annual tax revenue on untaxed wealth transferred between EU members. According to the Tax Justice Network, worldwide, a global super-rich elite had between $21 and $32 trillion (up to 26,000bn Euros) hidden in secret
tax haven A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
s by the end of 2010, resulting in a tax deficit of up to $280bn. Apart from arguments over whether or not austerity, rather than increased or frozen spending, is a macroeconomic solution, union leaders have also argued that the working population is being unjustly held responsible for the economic mismanagement errors of economists, investors, and bankers. Over 23 million EU workers have become unemployed as a consequence of the global economic crisis of 2007–2010, and this has led many to call for additional regulation of the banking sector across not only Europe, but the entire world. In the turmoil of the
Global Financial Crisis Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...
, the focus across all
EU member states The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been de ...
has been gradually to implement
austerity Austerity is a set of political-economic policies that aim to reduce government budget deficits through spending cuts, tax increases, or a combination of both. There are three primary types of austerity measures: higher taxes to fund spend ...
measures, with the purpose of lowering the budget deficits to levels below 3% of GDP, so that the debt level would either stay below -or start decline towards- the 60% limit defined by the Stability and Growth Pact. To further restore the confidence in Europe, 23 out of 27 EU countries also agreed to adopt the
Euro Plus Pact The Euro-Plus Pact (or Euro+ Pact, also initially called the Competitiveness Pact or later the Pact for the Euro) was adopted in March 2011 under EU's Open Method of Coordination, as an intergovernmental agreement between all member states of th ...
, consisting of political reforms to improve fiscal strength and competitiveness; 25 out of 27 EU countries also decided to implement the
Fiscal Compact The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union; also referred to as TSCG, or more plainly the Fiscal Stability Treaty is an intergovernmental treaty introduced as a new stricter version of the Stability ...
which include the commitment of each participating country to introduce a
balanced budget amendment A balanced budget amendment is a constitutional rule requiring that a state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government. Balanced-budget provisions have been added ...
as part of their national law/constitution. The Fiscal Compact is a direct successor of the previous Stability and Growth Pact, but it is more strict, not only because criteria compliance will be secured through its integration into national law/constitution, but also because it starting from 2014 will require all ratifying countries not involved in ongoing bailout programmes, to comply with the new strict criteria of only having a
structural deficit Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget ...
of either maximum 0.5% or 1% (depending on the debt level). Each of the eurozone countries being involved in a bailout programme (Greece, Portugal, and Ireland) was asked both to follow a programme with fiscal consolidation/austerity, and to restore competitiveness through implementation of structural reforms and
internal devaluation Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs – either wages or the indirect costs of employers. Sometimes internal deva ...
, i.e. lowering their relative
production costs Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost ...
. The measures implemented to restore competitiveness in the weakest countries are needed, not only to build the foundation for GDP growth, but also in order to decrease the current account imbalances among eurozone member states. Germany has come under pressure due to not having a government budget deficit and funding it by borrowing more. As of late 2014, the government (federal and state) has spent less than it receives in revenue, for the third year in a row, despite low economic growth. The 2015 budget includes a surplus for the first time since 1969. Current projections are that by 2019 the debt will be less than required by the Stability and Growth Pact. It has been a long known belief that austerity measures will always reduce the GDP growth in the short term. Some economists believing in
Keynesian Keynesian economics ( ; sometimes Keynesianism, named after British economist John Maynard Keynes) are the various macroeconomic theories and models of how aggregate demand (total spending in the economy) strongly influences economic output an ...
policies criticised the timing and amount of austerity measures being called for in the bailout programmes, as they argued such extensive measures should not be implemented during the crisis years with an ongoing recession, but if possible delayed until the years after some positive real GDP growth had returned. In October 2012, a report published by
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF) also found, that tax hikes and spending cuts during the most recent decade had indeed damaged the GDP growth more severely, compared to what had been expected and forecasted in advance (based on the "GDP damage ratios" previously recorded in earlier decades and under different economic scenarios). Already a half-year earlier, several European countries as a response to the problem with subdued GDP growth in the eurozone, likewise had called for the implementation of a new reinforced growth strategy based on additional public investments, to be financed by growth-friendly taxes on property, land, wealth, and financial institutions. In June 2012, EU leaders agreed as a first step to moderately increase the funds of the
European Investment Bank The European Investment Bank (EIB) is the European Union's investment bank and is owned by the EU Member States. It is one of the largest supranational lenders in the world. The EIB finances and invests both through equity and debt solution ...
, in order to kick-start infrastructure projects and increase loans to the private sector. A few months later 11 out of 17 eurozone countries also agreed to introduce a new EU financial transaction tax to be collected from 1 January 2014. ;Progress In April 2012,
Olli Rehn Olli Ilmari Rehn (; born 31 March 1962) is a Finnish economist and public official who has been serving as governor of the Bank of Finland since 2018. A member of the Centre Party, he previously served as the European Commissioner for Enlargeme ...
, the European commissioner for economic and monetary affairs in Brussels, "enthusiastically announced to EU parliamentarians in mid-April that 'there was a breakthrough before Easter'. He said the European heads of state had given the green light to pilot projects worth billions, such as building highways in Greece." Other growth initiatives include "project bonds" wherein the EIB would "provide guarantees that safeguard private investors. In the pilot phase until 2013, EU funds amounting to €230 million are expected to mobilise investments of up to €4.6 billion." ''
Der Spiegel ''Der Spiegel'' (, lit. ''"The Mirror"'') is a German weekly news magazine published in Hamburg. With a weekly circulation of 695,100 copies, it was the largest such publication in Europe in 2011. It was founded in 1947 by John Seymour Chaloner ...
'' also said: "According to sources inside the German government, instead of funding new highways, Berlin is interested in supporting innovation and programs to promote small and medium-sized businesses. To ensure that this is done as professionally as possible, the Germans would like to see the southern European countries receive their own state-owned development banks, modeled after Germany's arshall Plan-era-originKfW banking group. It's hoped that this will get the economy moving in Greece and Portugal." In multiple steps during 2012–2013, the ECB lowered its
bank rate Bank rate, also known as discount rate in American English, is the rate of interest which a central bank charges on its loans and advances to a commercial bank. The bank rate is known by a number of different terms depending on the country, and ...
to historical lows, reaching 0.25% in November 2013. Soon after the rates were shaved to 0.15%, then on 4 September 2014 the central bank shocked financial markets by cutting the razor-thin rates by a further two thirds from 0.15% to 0.05%, the lowest on record. The moves were designed to make it cheaper for banks to borrow from the ECB, with the aim that lower cost of money would be passed on to businesses taking out loans, boosting investment in the economy. The lowered borrowing rates caused the euro to fall in relation to other currencies, which it was hoped would boost exports from the eurozone.


Increase competitiveness

Crisis countries must significantly increase their international competitiveness to generate economic growth and improve their
terms of trade The terms of trade (TOT) is the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods. An i ...
. Indian-American journalist
Fareed Zakaria Fareed Rafiq Zakaria (; born 20 January 1964) is an Indian-American journalist, political commentator, and author. He is the host of CNN's ''Fareed Zakaria GPS'' and writes a weekly paid column for ''The Washington Post.'' He has been a columnist ...
notes in November 2011 that no debt restructuring will work without growth, even more so as European countries "face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalisation (which has allowed manufacturing and services to locate across the world)". In case of economic shocks, policy makers typically try to improve competitiveness by depreciating the currency, as in the case of Iceland, which suffered the largest financial crisis in 2008–2011 in economic history but has since vastly improved its position. Eurozone countries cannot devalue their currency. ;Internal devaluation As a workaround many policy makers try to restore competitiveness through
internal devaluation Internal devaluation is an economic and social policy option whose aim is to restore the international competitiveness of some country mainly by reducing its labour costs – either wages or the indirect costs of employers. Sometimes internal deva ...
, a painful economic adjustment process, where a country aims to reduce its unit labour costs. German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented relative wage moderation in the last five years, which helped decrease its relative price/wage levels by 16%. Greece would need to bring this figure down by 31%, effectively reaching the level of Turkey. By 2012, wages in Greece had been cut to a level last seen in the late 1990s. Purchasing power dropped even more to the level of 1986. Similarly, salaries in Italy fell to 1986 levels and consumption fell to the level of 1950. Other economists argue that no matter how much Greece and Portugal drive down their wages, they could never compete with low-cost developing countries such as China or India. Instead weak European countries must shift their economies to higher quality products and services, though this is a long-term process and may not bring immediate relief. ;Fiscal devaluation Another option would be to implement fiscal devaluation, based on an idea originally developed by
John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...
in 1931.Keynes, J M, (1931), Addendum to: Great Britain. Committee on Finance and Industry Report acmillan Report(London:His Majesty ́s Stationery Office, 1931) 190–209. Reprinted in Donald Moggridge, ''The Collected Writings of John Maynard Keynes'', vol. 20 (London: Macmillan and Cambridge: Cambridge Press for the Royal Economic Society, 1981), 283–309. According to this
neo-Keynesian The neoclassical synthesis (NCS), neoclassical–Keynesian synthesis, or just neo-Keynesianism was a neoclassical economics academic movement and paradigm in economics that worked towards reconciling the macroeconomic thought of John Maynard Ke ...
logic, policy makers can increase the competitiveness of an economy by lowering corporate tax burden such as employer's social security contributions, while offsetting the loss of government revenues through higher taxes on consumption ( VAT) and pollution, i.e. by pursuing an
ecological tax reform An environmental tax, ecotax (short for ecological taxation), or green tax is a tax levied on activities which are considered to be harmful to the environment and is intended to promote environmentally friendly activities via economic incentives. ...
. Germany has successfully pushed its economic competitiveness by increasing the
value added tax A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the en ...
(VAT) by three percentage points in 2007, and using part of the additional revenues to lower employer's unemployment insurance contribution. Portugal has taken a similar stance and also France appears to follow this suit. In November 2012 French president
François Hollande François Gérard Georges Nicolas Hollande (; born 12 August 1954) is a French politician who served as President of France from 2012 to 2017. He previously was First Secretary of the Socialist Party (France), First Secretary of the Socialist P ...
announced plans to reduce tax burden of the corporate sector by within three years, while increasing the standard VAT from 19.6% to 20% and introducing additional eco-taxes in 2016. To minimise negative effects of such policies on purchasing power and economic activity the French government will partly offset the tax hikes by decreasing employees' social security contributions by and by reducing the lower VAT for convenience goods (necessities) from 5.5% to 5%. ;Progress On 15 November 2011, the Lisbon Council published the Euro Plus Monitor 2011. According to the report most critical eurozone member countries are in the process of rapid reforms. The authors note that "Many of those countries most in need to adjust ../nowiki> are now making the greatest progress towards restoring their fiscal balance and external competitiveness". Greece, Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report (see graph). In its Euro Plus Monitor Report 2012, published in November 2012, the Lisbon Council finds that the eurozone has slightly improved its overall health. With the exception of Greece, all eurozone crisis countries are either close to the point where they have achieved the major adjustment or are likely to get there over the course of 2013. Portugal and Italy are expected to progress to the turnaround stage in spring 2013, possibly followed by Spain in autumn, while the fate of Greece continues to hang in the balance. Overall, the authors suggest that if the eurozone gets through the current acute crisis and stays on the reform path "it could eventually emerge from the crisis as the most dynamic of the major Western economies". The Euro Plus Monitor update from spring 2013 notes that the eurozone remains on the right track. According to the authors, almost all vulnerable countries in need of adjustment "are slashing their underlying fiscal deficits and improving their external competitiveness at an impressive speed", for which they expected the eurozone crisis to be over by the end of 2013.


Address current account imbalances

Regardless of the corrective measures chosen to solve the current predicament, as long as cross border capital flows remain unregulated in the euro area, current account imbalances are likely to continue. A country that runs a large current account or trade deficit (i.e., importing more than it exports) must ultimately be a net importer of capital; this is a mathematical
identity Identity may refer to: * Identity document * Identity (philosophy) * Identity (social science) * Identity (mathematics) Arts and entertainment Film and television * ''Identity'' (1987 film), an Iranian film * ''Identity'' (2003 film), an ...
called the
balance of payments In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., ...
. In other words, a country that imports more than it exports must either decrease its savings reserves or borrow to pay for those imports. Conversely, Germany's large trade surplus (net export position) means that it must either increase its savings reserves or be a net exporter of capital, lending money to other countries to allow them to buy German goods. The 2009 trade deficits for Italy, Spain, Greece, and Portugal were estimated to be $42.96bn, $75.31bn and $35.97bn, and $25.6bn respectively, while Germany's trade surplus was $188.6bn. A similar imbalance exists in the US, which runs a large trade deficit (net import position) and therefore is a net borrower of capital from abroad.
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Fed, he was appointed a distinguished fellow at the Brookings Institution. Duri ...
warned of the risks of such imbalances in 2005, arguing that a "savings glut" in one country with a trade surplus can drive capital into other countries with trade deficits, artificially lowering interest rates and creating asset bubbles. A country with a large trade surplus would generally see the value of its currency appreciate relative to other currencies, which would reduce the imbalance as the relative price of its exports increases. This currency appreciation occurs as the importing country sells its currency to buy the exporting country's currency used to purchase the goods. Alternatively, trade imbalances can be reduced if a country encouraged domestic saving by restricting or penalising the flow of capital across borders, or by raising interest rates, although this benefit is likely offset by slowing down the economy and increasing government interest payments. Either way, many of the countries involved in the crisis are on the euro, so devaluation, individual interest rates, and capital controls are not available. The only solution left to raise a country's level of saving is to reduce budget deficits and to change consumption and savings habits. For example, if a country's citizens saved more instead of consuming imports, this would reduce its trade deficit. It has therefore been suggested that countries with large trade deficits (e.g., Greece) consume less and improve their exporting industries. On the other hand, export driven countries with a large trade surplus, such as Germany, Austria and the Netherlands would need to shift their economies more towards domestic services and increase wages to support domestic consumption. Economic evidence indicates the crisis may have more to do with trade deficits (which require private borrowing to fund) than public debt levels. Economist
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was t ...
wrote in March 2013: "... the really strong relationship within the urozone countriesis between interest spreads and current account deficits, which is in line with the conclusion many of us have reached, that the euro area crisis is really a
balance of payments crisis A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated de ...
, not a debt crisis". A February 2013 paper from four economists concluded that, "Countries with debt above 80% of GDP and persistent current-account radedeficits are vulnerable to a rapid fiscal deterioration. ..." ;Progress In its spring 2012 economic forecast, the European Commission finds "some evidence that the current-account rebalancing is underpinned by changes in relative prices and competitiveness positions as well as gains in export market shares and expenditure switching in deficit countries". In May 2012 German finance minister Wolfgang Schäuble has signalled support for a significant increase in German wages to help decrease current account imbalances within the eurozone. According to the Euro Plus Monitor Report 2013, the collective current account of Greece, Ireland, Italy, Portugal, and Spain is improving rapidly and is expected to balance by mid 2013. Thereafter these countries as a group would no longer need to import capital. In 2014, the current account surplus of the eurozone as a whole almost doubled compared to the previous year, reaching a new record high of 227.9bn Euros.


Mobilisation of credit

Several proposals were made in mid-2012 to purchase the debt of distressed European countries such as Spain and Italy.
Markus Brunnermeier Markus Konrad Brunnermeier (born March 22, 1969) is an economist, who is the Edwards S. Sanford Professor of Economics at Princeton University, and a nonresident senior fellow at the Peterson Institute for International Economics. He is a facult ...
, the economist Graham Bishop, and
Daniel Gros Daniel Gros (born 1955) is a German economist who currently serves as the Director of the Centre for European Policy Studies (CEPS), a European think tank. Gros worked for the CEPS from 1986 to 1988 and has worked there continuously since 1990. ...
were among those advancing proposals. Finding a formula, which was not simply backed by Germany, is central in crafting an acceptable and effective remedy.


Commentary

US President
Barack Obama Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party (United States), Democratic Party, Obama was the first Af ...
stated in June 2012: "Right now, urope'sfocus has to be on strengthening their overall banking system...making a series of decisive actions that give people confidence that the banking system is solid ... In addition, they're going to have to look at how do they achieve growth at the same time as they're carrying out structural reforms that may take two or three or five years to fully accomplish. So countries like Spain and Italy, for example, have embarked on some smart structural reforms that everybody thinks are necessary—everything from tax collection to labour markets to a whole host of different issues. But they've got to have the time and the space for those steps to succeed. And if they are just cutting and cutting and cutting, and their unemployment rate is going up and up and up, and people are pulling back further from spending money because they're feeling a lot of pressure—ironically, that can actually make it harder for them to carry out some of these reforms over the long term ... addition to sensible ways to deal with debt and government finances, there's a parallel discussion that's taking place among European leaders to figure out how do we also encourage growth and show some flexibility to allow some of these reforms to really take root." ''
The Economist ''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
'' wrote in June 2012: "Outside Germany, a consensus has developed on what Mrs. Merkel must do to preserve the single currency. It includes shifting from austerity to a far greater focus on economic growth; complementing the single currency with a
Banking union of the European Union The banking union of the European Union is the transfer of responsibility for banking policy from the national to the EU level in several EU member states, initiated in 2012 as a response to the Eurozone crisis. The motivation for banking union w ...
(with euro-wide deposit insurance, bank oversight and joint means for the recapitalisation or resolution of failing banks); and embracing a limited form of debt mutualisation to create a joint safe asset and allow peripheral economies the room gradually to reduce their debt burdens. This is the refrain from Washington, Beijing, London, and indeed most of the capitals of the euro zone. Why hasn't the continent's canniest politician sprung into action?"


Proposed long-term solutions

The key policy issue that has to be addressed in the long run is how to harmonise different political-economic institutional set-ups of the north and south European economies to promote economic growth and make the currency union sustainable. The Eurozone member states must adopt structural reforms, aimed at promoting labour market mobility and wage flexibility, restoring the south's economies’ competitiveness by increasing their productivity. At the same time, it is vital to keep in mind that just putting emphasis on emulating LME's wage-setting system to CMEs and mixed-market economies will not work. Therefore, apart from wage issues, structural reforms should be focused on developing capacities for innovations, technologies, education, R&D, etc., i.e. all institutional subsystems, crucial for firms’ success. In economies of the south special attention should be given to creating less labour-intensive industries to avoid price competition pressure from emerging low-cost countries (such as China) via an exchange rate channel, and providing a smooth transition of workers from old unsustainable industries to new ones based on the so-called Nordic-style ‘flexicurity’ market model.


European fiscal union

The crisis is pressuring Europe to move beyond a regulatory state and towards a more federal EU with fiscal powers. Increased European integration giving a central body increased control over the budgets of member states was proposed on 14 June 2012 by
Jens Weidmann Jens Weidmann (born 20 April 1968) is a German economist who served as president of the Deutsche Bundesbank between 2011 and 2021. He also served as chairman of the Board of the Bank for International Settlements. Before moving to the Bundesbank, ...
, President of the
Deutsche Bundesbank The Deutsche Bundesbank (), literally "German Federal Bank", is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks (ESCB). Due to its strength and former size, the Bundesbank is the most ...
, expanding on ideas first proposed by
Jean-Claude Trichet Jean-Claude Trichet (; born 20 December 1942) is a French economist who served as President of the European Central Bank from 2003 to 2011. Previous to his assumption of the presidency he served as Governor of the Bank of France from 1993 to 2003 ...
, former president of the European Central Bank. Control, including requirements that taxes be raised or budgets cut, would be exercised only when fiscal imbalances developed. This proposal is similar to contemporary calls by Angela Merkel for increased political and fiscal union which would "allow Europe oversight possibilities".


European bank recovery and resolution authority

European banks are estimated to have incurred losses approaching €1 trillion between the outbreak of the financial crisis in 2007 and 2010. The European Commission approved some €4.5 billion in state aid for banks between October 2008 and October 2011, a sum which includes the value of taxpayer-funded recapitalisations and public guarantees on banking debts. This has prompted some economists such as
Joseph Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, and a full professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the J ...
and
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was t ...
to note that Europe is not suffering from a sovereign debt crisis but rather from a banking crisis. On 6 June 2012, the European Commission adopted a legislative proposal for a harmonised bank recovery and resolution mechanism. The proposed framework sets out the necessary steps and powers to ensure that bank failures across the EU are managed in a way that avoids financial instability. The new legislation would give member states the power to impose losses, resulting from a bank failure, on the bondholders to minimise costs for taxpayers. The proposal is part of a new scheme in which banks will be compelled to "bail-in" their creditors whenever they fail, the basic aim being to prevent taxpayer-funded bailouts in the future. The public authorities would also be given powers to replace the management teams in banks even before the lender fails. Each institution would also be obliged to set aside at least one per cent of the deposits covered by their national guarantees for a special fund to finance the resolution of banking crisis starting in 2018.


Eurobonds

A growing number of investors and economists say
eurobonds Eurobond may refer to: * Eurobond (external bond), a bond issued that is denominated in a currency not native to the country where it is issued * Eurobond (eurozone) Eurobonds or stability bonds were proposed government bonds to be issued in ...
would be the best way of solving a debt crisis, though their introduction matched by tight financial and budgetary co-ordination may well require changes in EU treaties. On 21 November 2011, the European Commission suggested that eurobonds issued jointly by the 17 euro nations would be an effective way to tackle the financial crisis. Using the term "stability bonds", Jose Manuel Barroso insisted that any such plan would have to be matched by tight fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid
moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
and ensure sustainable public finances. Germany remains largely opposed at least in the short term to a collective takeover of the debt of states that have run excessive budget deficits and borrowed excessively over the past years.


European Safe Bonds

A group of economists from
Princeton University Princeton University is a private research university in Princeton, New Jersey. Founded in 1746 in Elizabeth as the College of New Jersey, Princeton is the fourth-oldest institution of higher education in the United States and one of the ...
suggest a new form of European Safe Bonds (ESBies), i.e. bundled European government bonds (70% senior bonds, 30% junior bonds) in the form of a "union-wide safe asset without joint liability". According to the authors, ESBies "would be at least as safe as German bonds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche". ESBies could be issued by public or private-sector entities and would "weaken the diabolic loop and its diffusion across countries". It requires "no significant change in treaties or legislation.“ In 2017 the idea was picked up by the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
. The
European Commission The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body ...
has also shown interest and plans to include ESBies in a future
white paper A white paper is a report or guide that informs readers concisely about a complex issue and presents the issuing body's philosophy on the matter. It is meant to help readers understand an issue, solve a problem, or make a decision. A white paper ...
dealing with the aftermath of the financial crisis. The European Commission has recently introduced a proposal to introduce what it calls Sovereign Bond Backed Securities (SBBS) which are essentially the same as ESBies and the European Parliament endorsed the changes in regulations necessary to facilitate these securities in April 2019.


European Monetary Fund

On 20 October 2011, the
Austrian Institute of Economic Research The Austrian Institute of Economic Research (german: Österreichisches Institut für Wirtschaftsforschung, WIFO) is a private non-profit association located in Vienna, Austria. The institute was founded in 1927 by Friedrich Hayek and Ludwig von ...
published an article that suggests transforming the EFSF into a
European Monetary Fund The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special Treaty Establishing the European Stabi ...
(EMF), which could provide governments with fixed interest rate Eurobonds at a rate slightly below medium-term economic growth (in nominal terms). These bonds would not be tradable but could be held by investors with the EMF and liquidated at any time. Given the backing of all eurozone countries and the ECB, "the EMU would achieve a similarly strong position vis-à-vis financial investors as the US where the Fed backs government bonds to an unlimited extent". To ensure fiscal discipline despite lack of market pressure, the EMF would operate according to strict rules, providing funds only to countries that meet fiscal and macroeconomic criteria. Governments lacking sound financial policies would be forced to rely on traditional (national) governmental bonds with less favourable market rates. The econometric analysis suggests that "If the short-term and long- term interest rates in the euro area were stabilised at 1.5% and 3%, respectively, aggregate output (GDP) in the euro area would be 5 percentage points above baseline in 2015". At the same time, sovereign debt levels would be significantly lower with, e.g., Greece's debt level falling below 110% of GDP, more than 40
percentage point A percentage point or percent point is the unit for the arithmetic difference between two percentages. For example, moving up from 40 percent to 44 percent is an increase of 4 percentage points, but a 10-percent increase in the quantity being m ...
s below the baseline scenario with market-based interest levels. Furthermore, banks would no longer be able to benefit unduly from intermediary profits by borrowing from the ECB at low rates and investing in government bonds at high rates.


Debt write-off financed by wealth tax

According to the
Bank for International Settlements The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work th ...
, the combined private and public debt of 18
OECD The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate ...
countries nearly quadrupled between 1980 and 2010, and will likely continue to grow, reaching between 250% (for Italy) and about 600% (for Japan) by 2040. A BIS study released in June 2012 warns that budgets of most advanced economies, excluding interest payments, "would need 20 consecutive years of surpluses exceeding 2 per cent of gross domestic product—starting now—just to bring the debt-to-GDP ratio back to its pre-crisis level". The same authors found in a previous study that increased financial burden imposed by ageing populations and lower growth makes it unlikely that indebted economies can grow out of their debt problem if only one of the following three conditions is met: * government debt is more than 80 to 100% of GDP; * non-financial corporate debt is more than 90% of GDP; * private household debt is more than 85% of GDP. The first condition, suggested by an influential paper written by
Kenneth Rogoff Kenneth Saul Rogoff (born March 22, 1953) is an American economist and chess Grandmaster. He is the Thomas D. Cabot Professor of Public Policy and professor of economics at Harvard University. Early life Rogoff grew up in Rochester, New York. ...
&
Carmen Reinhart Carmen M. Reinhart (née Castellanos, born October 7, 1955) is a Cuban-American economist and the Minos A. Zombanakis Professor of the International Financial System at Harvard Kennedy School. Previously, she was the Dennis Weatherstone Senior Fe ...
has been disputed due to major calculation errors. In fact, the average GDP growth at public debt/GDP ratios over 90% is not dramatically different from when debt/GDP ratios are lower. The
Boston Consulting Group Boston Consulting Group, Inc. (BCG) is an American global management consulting firm founded in 1963 and headquartered in Boston, Massachusetts. It is one of the Big Three (or MBB, the world’s three largest management consulting firms by re ...
(BCG) adds that if the overall debt load continues to grow faster than the economy, then large-scale debt restructuring becomes inevitable. To prevent a vicious upward debt spiral from gaining momentum the authors urge policymakers to "act quickly and decisively" and aim for an overall debt level well below 180% for the private and government sector. This number is based on the assumption that governments, non-financial corporations, and private households can each sustain a debt load of 60% of GDP, at an interest rate of five per cent and a nominal economic growth rate of three per cent per year. Lower interest rates and/or higher growth would help reduce the debt burden further. To reach sustainable levels the eurozone must reduce its overall debt level by €6.1 trillion. According to BCG, this could be financed by a one-time
wealth tax A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownershi ...
of between 11 and 30% for most countries, apart from the crisis countries (particularly Ireland) where a write-off would have to be substantially higher. The authors admit that such programmes would be "drastic", "unpopular" and "require broad political coordination and leadership" but they maintain that the longer politicians and central bankers wait, the more necessary such a step will be.
Thomas Piketty Thomas Piketty (; born 7 May 1971) is a French economist who is Professor of Economics at the School for Advanced Studies in the Social Sciences, Associate Chair at the Paris School of Economics and Centennial Professor of Economics in the In ...
, French economist and author of the bestselling book '' Capital in the Twenty-First Century'' regards taxes on capital as a more favorable option than ''austerity'' (inefficient and unjust) and ''inflation'' (only affects cash but neither real estates nor business capital). According to his analysis, a
flat tax A flat tax (short for flat-rate tax) is a tax with a single rate on the taxable amount, after accounting for any deductions or exemptions from the tax base. It is not necessarily a fully proportional tax. Implementations are often progress ...
of 15 percent on private wealth would provide the state with nearly a year's worth national income, which would allow for immediate reimbursement of the entire public debt. Instead of a one-time write-off, German economist Harald Spehl has called for a 30-year debt-reduction plan, similar to the one Germany used after World War II to share the burden of reconstruction and development. Similar calls have been made by political parties in Germany including the Greens and The Left.


Debt write-off based on international agreement

In 2015 Hans-Werner Sinn, president of German
Ifo Institute for Economic Research The Ifo Institute for Economic Research is a Munich-based research institution. Ifo is an acronym from Information and Forschung (research). As one of Germany's largest economic think-tanks, it analyses economic policy and is widely known for its ...
, called for a debt relief for Greece. In addition, economists from London School of Economics suggested a debt relief similar to the London agreement. In 1953, private sector lenders as well as governments agreed to write off about half of
West Germany West Germany is the colloquial term used to indicate the Federal Republic of Germany (FRG; german: Bundesrepublik Deutschland , BRD) between its formation on 23 May 1949 and the German reunification through the accession of East Germany on 3 ...
’s outstanding debt; this was followed by the beginning of Germany's "economic miracle" (or '). According to this agreement, West Germany had to make repayments only when it was running a trade surplus, that is "when it had earned the money to pay up, rather than having to borrow more, or dip into its foreign currency reserves. Its repayments were also limited to 3% of export earnings." As LSE researchers note, this had the effect that, Germany's creditors had an incentive to buy the country's goods, so that it would be able to afford to pay them.


Controversies

The European bailouts are largely about shifting exposure from banks and others, who otherwise are lined up for losses on the sovereign debt they have piled up, onto European taxpayers.


EU treaty violations

;No bail-out clause The EU's
Maastricht Treaty The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve member states of the European Communities, it announced "a new stage in the ...
contains juridical language that appears to rule out intra-EU bailouts. First, the "no bail-out" clause ( Article 125 TFEU) ensures that the responsibility for repaying public debt remains national and prevents risk premiums caused by unsound fiscal policies from spilling over to partner countries. The clause thus encourages prudent fiscal policies at the national level. The
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
's purchase of distressed country bonds can be viewed as violating the prohibition of monetary financing of budget deficits ( Article 123 TFEU). The creation of further leverage in EFSF with access to ECB lending would also appear to violate the terms of this article. Articles 125 and 123 were meant to create disincentives for EU member states to run excessive deficits and state debt, and prevent the
moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...
of over-spending and lending in good times. They were also meant to protect the taxpayers of the other more prudent member states. By issuing bail-out aid guaranteed by prudent eurozone taxpayers to rule-breaking eurozone countries such as Greece, the EU and eurozone countries also encourage moral hazard in the future. While the no bail-out clause remains in place, the "no bail-out doctrine" seems to be a thing of the past. ;Convergence criteria The EU treaties contain so called
convergence criteria The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their curre ...
, specified in the protocols of the
Treaties of the European Union The Treaties of the European Union are a set of international treaties between the European Union (EU) member states which sets out the EU's constitutional basis. They establish the various EU institutions together with their remit, procedures ...
. As regards government finance, the states agreed that the annual government budget deficit should not exceed 3% of gross domestic product (GDP) and that the gross
government debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...
to GDP should not exceed 60% of GDP (see protocol 12 and 13). For
eurozone The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU pol ...
members there is the Stability and Growth Pact, which contains the same requirements for budget deficit and debt limitation but with a much stricter regime. In the past, many European countries have substantially exceeded these criteria over a long period of time. Around 2005 most eurozone members violated the pact, resulting in no action taken against violators.


Credit rating agencies

The international US-based credit rating agencies
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
,
Standard & Poor's S&P Global Ratings (previously Standard & Poor's and informally known as S&P) is an American credit rating agency (CRA) and a division of S&P Global that publishes financial research and analysis on stocks, bonds, and commodities. S&P is con ...
and Fitch—which have already been under fire during the
housing bubble A housing bubble (or a housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. Firs ...
and the Icelandic crisis—have also played a central and controversial role in the current European bond market crisis. On one hand, the agencies have been accused of giving overly generous ratings due to conflicts of interest. On the other hand, ratings agencies have a tendency to act conservatively, and to take some time to adjust when a firm or country is in trouble. In the case of Greece, the market responded to the crisis before the downgrades, with Greek bonds trading at junk levels several weeks before the ratings agencies began to describe them as such. According to a study by economists at
St Gallen University ST, St, or St. may refer to: Arts and entertainment * Stanza, in poetry * Suicidal Tendencies, an American heavy metal/hardcore punk band * Star Trek, a science-fiction media franchise * Summa Theologica, a compendium of Catholic philosophy an ...
credit rating agencies have fuelled rising euro zone indebtedness by issuing more severe downgrades since the sovereign debt crisis unfolded in 2009. The authors concluded that rating agencies were not consistent in their judgments, on average rating Portugal, Ireland, and Greece 2.3 notches lower than under pre-crisis standards, eventually forcing them to seek international aid. On a side note: as of end of November 2013 only three countries in the eurozone retain AAA ratings from Standard & Poor, i.e. Germany, Finland and Luxembourg. European policy makers have criticised ratings agencies for acting politically, accusing the Big Three of bias towards European assets and fuelling speculation. Particularly
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
decision to downgrade Portugal's foreign debt to the category Ba2 "junk" has infuriated officials from the EU and Portugal alike. State-owned utility and infrastructure companies like ANA – Aeroportos de Portugal,
Energias de Portugal EDP - Energias de Portugal (formerly Electricidade de Portugal) is a Portuguese electric utilities company, headquartered in Lisbon. It was founded in 1976 through the merger of 14 nationalised electricity companies. History EDP was founded as ...
, Redes Energéticas Nacionais, and Brisa – Auto-estradas de Portugal were also downgraded despite claims to having solid financial profiles and significant foreign revenue. France too has shown its anger at its downgrade. French central bank chief
Christian Noyer Christian Noyer (born 6 October 1950) is a French economist who served as Governor of the Bank of France from 2003 to 2015. In this capacity, he chaired the Bank for International Settlements from 2010 until 2015. He had previously served as Vice ...
criticised the decision of Standard & Poor's to lower the rating of France but not that of the United Kingdom, which "has more deficits, as much debt, more inflation, less growth than us". Similar comments were made by high-ranking politicians in Germany. Michael Fuchs, deputy leader of the leading
Christian Democrats __NOTOC__ Christian democratic parties are political parties that seek to apply Christian principles to public policy. The underlying Christian democracy movement emerged in 19th-century Europe, largely under the influence of Catholic social tea ...
, said: "Standard and Poor's must stop playing politics. Why doesn't it act on the highly indebted United States or highly indebted Britain?", adding that the latter's collective private and public sector debts are the largest in Europe. He further added: "If the agency downgrades France, it should also downgrade Britain in order to be consistent." Credit rating agencies were also accused of bullying politicians by systematically downgrading eurozone countries just before important European Council meetings. As one EU source put it: "It is interesting to look at the downgradings and the timings of the downgradings... It is strange that we have so many downgrades in the weeks of summits." ;Regulatory reliance on credit ratings Think-tanks such as the have criticised European powers such as France and Germany for pushing for the adoption of the
Basel II Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was publi ...
recommendations, adopted in 2005 and transposed in European Union law through the Capital Requirements Directive (CRD), effective since 2008. In essence, this forced European banks and more importantly the
European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...
, e.g. when gauging the
solvency Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-te ...
of EU-based financial institutions, to rely heavily on the standardised assessments of
credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
marketed by only two private US firms- Moody's and S&P. ;Counter measures Due to the failures of the ratings agencies, European regulators obtained new powers to supervise ratings agencies. With the creation of the
European Supervisory Authority The European System of Financial Supervision (ESFS) is the framework for financial supervision in the European Union that has been in operation since 2011. The system consists of the ''European Supervisory Authorities'' (ESAs), the European Syste ...
in January 2011 the EU set up a whole range of new financial regulatory institutions, including the European Securities and Markets Authority (ESMA), which became the EU's single credit-ratings firm regulator. Credit-ratings companies have to comply with the new standards or will be denied operation on EU territory, says ESMA Chief Steven Maijoor. Germany's foreign minister Guido Westerwelle called for an "independent" European ratings agency, which could avoid the conflicts of interest that he claimed US-based agencies faced. European leaders are reportedly studying the possibility of setting up a European ratings agency in order that the private US-based ratings agencies have less influence on developments in European financial markets in the future. According to German consultant company
Roland Berger Roland Berger (born 22 November 1937) is a German entrepreneur, consultant and philanthropist. Life Roland Berger was born in Berlin in 1937 as Robert Altmann; his family name changed later, after his father, Georg L. Berger, married his moth ...
, setting up a new ratings agency would cost €300 million. On 30 January 2012, the company said it was already collecting funds from financial institutions and business intelligence agencies to set up an independent non-profit ratings agency by mid-2012, which could provide its first country ratings by the end of the year. In April 2012, in a similar attempt, the
Bertelsmann Stiftung The Bertelsmann Stiftung is an independent foundation under private law, based in Gütersloh, Germany. It was founded in 1977 by Reinhard Mohn as the result of social, corporate and fiscal considerations. As the Bertelsmann Stiftung itself ...
presented a blueprint for establishing an international non-profit credit rating agency (INCRA) for sovereign debt, structured in way that management and rating decisions are independent from its financiers. But attempts to regulate credit rating agencies more strictly in the wake of the eurozone crisis have been rather unsuccessful. financial law and regulation experts have argued that the hastily drafted, unevenly transposed in national law, and poorly enforced EU rule on ratings agencies (Regulation EC N° 1060/2009) has had little effect on the way financial analysts and economists interpret data or on the potential for conflicts of interests created by the complex contractual arrangements between credit rating agencies and their clients"


Media

Some in the Greek, Spanish, and French press and elsewhere spread conspiracy theories that claimed that the U.S. and Britain were deliberately promoting rumors about the euro in order to cause its collapse or to distract attention from their own economic vulnerabilities. ''
The Economist ''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
'' rebutted these "Anglo-Saxon conspiracy" claims, writing that although American and British traders overestimated the weakness of southern European public finances and the probability of the breakup of the eurozone breakup, these sentiments were an ordinary market panic, rather than some deliberate plot. Greek Prime Minister Papandreou is quoted as saying that there was no question of Greece leaving the euro and suggested that the crisis was politically as well as financially motivated. "This is an attack on the eurozone by certain other interests, political or financial". The Spanish Prime Minister
José Luis Rodríguez Zapatero José Luis Rodríguez Zapatero (; born 4 August 1960) is a Spanish politician and member of the Spanish Socialist Workers' Party (PSOE). He was the Prime Minister of Spain being elected for two terms, in the 2004 and 2008 general elections. ...
has also suggested that the recent financial market crisis in Europe is an attempt to undermine the euro. He ordered the
Centro Nacional de Inteligencia National Intelligence Centre may refer to: * National Intelligence Centre (Mexico) * National Intelligence Centre (Spain) The National Intelligence Centre ( es, Centro Nacional de Inteligencia, CNI) is the Spanish official intelligence agency ...
intelligence service (National Intelligence Centre, CNI in Spanish) to investigate the role of the "
Anglo-Saxon The Anglo-Saxons were a cultural group who inhabited England in the Early Middle Ages. They traced their origins to settlers who came to Britain from mainland Europe in the 5th century. However, the ethnogenesis of the Anglo-Saxons happened wit ...
media" in fomenting the crisis. So far, no results have been reported from this investigation. Other commentators believe that the euro is under attack so that countries, such as the UK and the US, can continue to fund their large external deficits and government deficits, and to avoid the collapse of the US$. The US and UK do not have large domestic savings pools to draw on and therefore are dependent on external savings e.g. from China. This is not the case in the eurozone, which is self-funding.


Speculators

Both the Spanish and Greek Prime Ministers have accused
financial speculator In finance, speculation is the purchase of an asset (a commodity, good (economics), goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline i ...
s and
hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
s of worsening the crisis by short selling euros. German chancellor Merkel has stated that "institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere".
Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, Ho ...
and other banks faced an inquiry by the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
over their derivatives arrangements with Greece. The ''Guardian'' reported that "Goldman was reportedly the most heavily involved of a dozen or so Wall Street banks" that assisted the Greek government in the early 2000s "to structure complex derivatives deals early in the decade and 'borrow' billions of dollars in exchange rate swaps, which did not officially count as debt under eurozone rules." Critics of the bank's conduct said that these deals "contributed to unsustainable public finances" which in turn destabilized the eurozone. In response to accusations that speculators were worsening the problem, some markets banned
naked short selling Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the asset from someone else or ensuring that it can be borrowed. When the seller does not obtain the asset and deliv ...
for a few months.


Speculation about the break-up of the eurozone

Some economists, mostly from outside Europe and associated with
Modern Monetary Theory Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox * * * * * * macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply ...
and other
post-Keynesian Post-Keynesian economics is a school of economic thought with its origins in '' The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney ...
schools, condemned the design of the euro currency system from the beginning because it ceded national monetary and economic sovereignty but lacked a central fiscal authority. When faced with economic problems, they maintained, "Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place." US economist
Martin Feldstein Martin Stuart Feldstein ( ; November 25, 1939 – June 11, 2019) was an American economist. He was the George F. Baker Professor of Economics at Harvard University and the president emeritus of the National Bureau of Economic Research (NBE ...
went so far to call the euro "an experiment that failed". Some non-Keynesian economists, such as Luca A. Ricci of the IMF, contend that the eurozone does not fulfil the necessary criteria for an optimum currency area, though it is moving in that direction. As the debt crisis expanded beyond Greece, these economists continued to advocate, albeit more forcefully, the disbandment of the eurozone. If this was not immediately feasible, they recommended that Greece and the other debtor nations unilaterally leave the eurozone, default on their debts, regain their fiscal sovereignty, and re-adopt national currencies.M. Nicolas J. Firzli, "Greece and the Roots the EU Debt Crisis" ''The Vienna Review'', March 2010 Bloomberg suggested in June 2011 that, if the Greek and Irish bailouts should fail, an alternative would be for Germany to leave the eurozone to save the currency through
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...
instead of austerity. The likely substantial fall in the euro against a newly reconstituted
Deutsche Mark The Deutsche Mark (; English: ''German mark''), abbreviated "DM" or "D-Mark" (), was the official currency of West Germany from 1948 until 1990 and later the unified Germany from 1990 until the adoption of the euro in 2002. In English, it was ...
would give a "huge boost" to its members' competitiveness. Iceland, not part of the EU, is regarded as one of Europe's recovery success stories. It defaulted on its debt and drastically devalued its currency, which has effectively reduced wages by 50% making exports more competitive. Lee Harris argues that floating exchange rates allows wage reductions by currency devaluations, a politically easier option than the economically equivalent but politically impossible method of lowering wages by political enactment. Sweden's floating rate currency gives it a short-term advantage, structural reforms and constraints account for longer-term prosperity. Labour concessions, a minimal reliance on public debt, and tax reform helped to further a pro-growth policy. British discount retailer
Poundland Poundland is a British variety store chain founded in 1990. It once sold most items at the single price of £1, including clearance items and proprietary brands. The first pilot store opened in December 1990 following numerous rejections b ...
chose the name Dealz and not "Euroland" for its 2011 expansion into Ireland because, CEO Jim McCarthy said, "'Eurozone' ... is usually reported in association with bad news — job losses, debts and increased taxes". His company planned to use Dealz in continental Europe; McCarthy stated that "There is less certainty about the longevity f the currency unionnow". ''
The Wall Street Journal ''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' conjectured as well that Germany could return to the Deutsche Mark, or create another
currency union A currency union (also known as monetary union) is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration (such as an economic and monetary union, ...
with the Netherlands, Austria, Finland, Luxembourg and other European countries such as Denmark, Norway, Sweden, Switzerland, and the Baltics. A monetary union of these countries with current account surpluses would create the world's largest creditor bloc, bigger than China or Japan. ''The Wall Street Journal'' added that without the German-led bloc, a residual euro would have the flexibility to keep
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
s low and engage in
quantitative easing Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
or
fiscal stimulus In economics, stimulus refers to attempts to use monetary policy or fiscal policy (or stabilization policy in general) to stimulate the economy. Stimulus can also refer to monetary policies such as lowering interest rates and quantitative easin ...
in support of a job-targeting economic policy instead of
inflation targeting In macroeconomics, inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the medium-term and announces this inflation target to the public. The assumption is that the best that moneta ...
in the current configuration. ;Breakup vs. deeper integration There is opposition in this view. The national exits are expected to be an expensive proposition. The breakdown of the currency would lead to insolvency of several euro zone countries, a breakdown in intrazone payments. Having instability and the public debt issue still not solved, the contagion effects and instability would spread into the system. Having that the exit of Greece would trigger the breakdown of the eurozone, this is not welcomed by many politicians, economists and journalists. According to Steven Erlanger from The New York Times, a "Greek departure is likely to be seen as the beginning of the end for the whole euro zone project, a major accomplishment, whatever its faults, in the post-War construction of a Europe "whole and at peace". Likewise, the two big leaders of the Euro zone, German Chancellor
Angela Merkel Angela Dorothea Merkel (; ; born 17 July 1954) is a German former politician and scientist who served as Chancellor of Germany from 2005 to 2021. A member of the Christian Democratic Union (CDU), she previously served as Leader of the Opp ...
and former French president
Nicolas Sarkozy Nicolas Paul Stéphane Sarközy de Nagy-Bocsa (; ; born 28 January 1955) is a French politician who served as President of France from 2007 to 2012. Born in Paris, he is of Hungarian, Greek Jewish, and French origin. Mayor of Neuilly-sur-Se ...
have said on numerous occasions that they would not allow the eurozone to disintegrate and have linked the survival of the Euro with that of the entire
European Union The European Union (EU) is a supranational union, supranational political union, political and economic union of Member state of the European Union, member states that are located primarily in Europe, Europe. The union has a total area of ...
. In September 2011, EU commissioner Joaquín Almunia shared this view, saying that expelling weaker countries from the euro was not an option: "Those who think that this hypothesis is possible just do not understand our process of integration". The former ECB president
Jean-Claude Trichet Jean-Claude Trichet (; born 20 December 1942) is a French economist who served as President of the European Central Bank from 2003 to 2011. Previous to his assumption of the presidency he served as Governor of the Bank of France from 1993 to 2003 ...
also denounced the possibility of a return of the Deutsche Mark. The challenges to the speculation about the break-up or salvage of the eurozone is rooted in its innate nature that the break-up or salvage of eurozone is not only an economic decision but also a critical political decision followed by complicated ramifications that "If Berlin pays the bills and tells the rest of Europe how to behave, it risks fostering destructive nationalist resentment against Germany and ... it would strengthen the camp in Britain arguing for an exit—a problem not just for Britons but for all economically liberal Europeans. Solutions which involve greater integration of European banking and fiscal management and supervision of national decisions by European umbrella institutions can be criticised as Germanic domination of European political and economic life. According to US author
Ross Douthat Ross Gregory Douthat (born 1979) is an American political analyst, blogger, author and ''New York Times'' columnist. He was a senior editor of ''The Atlantic''. He has written on a variety of topics, including the state of Christianity in Americ ...
"This would effectively turn the European Union into a kind of postmodern version of the old
Austro-Hungarian Empire Austria-Hungary, often referred to as the Austro-Hungarian Empire,, the Dual Monarchy, or Austria, was a constitutional monarchy and great power in Central Europe between 1867 and 1918. It was formed with the Austro-Hungarian Compromise of ...
, with a Germanic elite presiding uneasily over a polyglot imperium and its restive local populations". ''
The Economist ''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Eco ...
'' provides a somewhat modified approach to saving the euro in that "a limited version of federalisation could be less miserable solution than break-up of the euro". The recipe to this tricky combination of the limited federalisation, greatly lies on mutualisation for limiting the fiscal integration. In order for overindebted countries to stabilise the dwindling euro and economy, the overindebted countries require "access to money and for banks to have a "safe" euro-wide class of assets that is not tied to the fortunes of one country" which could be obtained by "narrower Eurobond that mutualises a limited amount of debt for a limited amount of time". The proposition made by
German Council of Economic Experts The German Council of Economic Experts ( German: ') is a group of economists set up in 1963 to evaluate economic policies of the German government. In the media, the council is often referred to as the "Five Sages of Economy" (''Fünf Wirtschaftswe ...
provides detailed blue print to mutualise the current debts of all euro-zone economies above 60% of their GDP. Instead of the break-up and issuing new national governments bonds by individual euro-zone governments, "everybody, from Germany (debt: 81% of GDP) to Italy (120%) would issue only these joint bonds until their national debts fell to the 60% threshold. The new mutualised-bond market, worth some €2.3 trillion, would be paid off over the next 25 years. Each country would pledge a specified tax (such as a VAT surcharge) to provide the cash." So far, German Chancellor
Angela Merkel Angela Dorothea Merkel (; ; born 17 July 1954) is a German former politician and scientist who served as Chancellor of Germany from 2005 to 2021. A member of the Christian Democratic Union (CDU), she previously served as Leader of the Opp ...
has opposed all forms of mutualisation. The Hungarian-American business magnate
George Soros George Soros ( name written in eastern order), (born György Schwartz, August 12, 1930) is a Hungarian-American businessman and philanthropist. , he had a net worth of US$8.6 billion, Note that this site is updated daily. having donated mo ...
warns in "Does the Euro have a Future?" that there is no escape from the "gloomy scenario" of a prolonged European recession and the consequent threat to the Eurozone's political cohesion so long as "the authorities persist in their current course". He argues that to save the Euro long-term structural changes are essential in addition to the immediate steps needed to arrest the crisis. The changes he recommends include even greater economic integration of the European Union. Soros writes that a treaty is needed to transform the European Financial Stability Fund into a full-fledged European Treasury. Following the formation of the Treasury, the European Council could then authorise the ECB to "step into the breach", with risks to the ECB's solvency being indemnified. Soros acknowledges that converting the EFSF into a European Treasury will necessitate "a radical change of heart". In particular, he cautions, Germans will be wary of any such move, not least because many continue to believe that they have a choice between saving the Euro and abandoning it. Soros writes that a collapse of the European Union would precipitate an uncontrollable financial meltdown and thus "the only way" to avert "another Great Depression" is the formation of a European Treasury.


Odious debt

Some protesters, commentators such as ''
Libération ''Libération'' (), popularly known as ''Libé'' (), is a daily newspaper in France, founded in Paris by Jean-Paul Sartre and Serge July in 1973 in the wake of the protest movements of May 1968. Initially positioned on the far-left of France' ...
'' correspondent Jean Quatremer and the
Liège Liège ( , , ; wa, Lîdje ; nl, Luik ; german: Lüttich ) is a major city and municipality of Wallonia and the capital of the Belgian province of Liège. The city is situated in the valley of the Meuse, in the east of Belgium, not far fro ...
-based NGO
Committee for the Abolition of the Third World Debt The Committee for the Abolition of Illegitimate Debt (CADTM), formerly called the Committee for the Cancellation of the Third World Debt (CCTWD), is an international network of activists founded on 15 March 1990 in Belgium that campaigns for the ca ...
(CADTM) allege that the debt should be characterised as odious debt. The Greek documentary ''
Debtocracy ''Debtocracy'' ( el, Χρεοκρατία ''Chreokratía'') is a 2011 left-wing documentary film by Katerina Kitidi and Aris Chatzistefanou. The documentary examines the causes of the Greek debt crisis in 2010 and advocates for the default of " ...
'', and a book of the same title and content examine whether the recent
Siemens scandal of January 1914 involved collusion between several high-ranking members of the Imperial Japanese Navy, the British company Vickers, and the German industrial conglomerate of Siemens AG. It was one of several spectacular political scandals of la ...
and uncommercial ECB loans which were conditional on the purchase of military aircraft and submarines are evidence that the loans amount to odious debt and that an audit would result in invalidation of a large amount of the debt.


Manipulated debt and deficit statistics

In 1992, members of the European Union signed an agreement known as the
Maastricht Treaty The Treaty on European Union, commonly known as the Maastricht Treaty, is the foundation treaty of the European Union (EU). Concluded in 1992 between the then-twelve member states of the European Communities, it announced "a new stage in the ...
, under which they pledged to limit their deficit spending and debt levels. Some EU member states, including Greece and Italy, were able to circumvent these rules and mask their deficit and debt levels through the use of complex currency and credit derivatives structures. The structures were designed by prominent US investment banks, who received substantial fees in return for their services and who took on little credit risk themselves thanks to special legal protections for derivatives counterparties. Financial reforms within the U.S. since the financial crisis have only served to reinforce special protections for derivatives—including greater access to government guarantees—while minimising disclosure to broader financial markets. The revision of Greece's 2009 budget deficit from a forecast of "6–8% of GDP" to 12.7% by the new Pasok Government in late 2009 (a number which, after reclassification of expenses under IMF/EU supervision was further raised to 15.4% in 2010) has been cited as one of the issues that ignited the Greek debt crisis. This added a new dimension in the world financial turmoil, as the issues of "
creative accounting Creative accounting is a euphemism referring to accounting practices that may follow the letter of the rules of standard accounting practices, but deviate from the spirit of those rules with questionable accounting ethics—specifically distort ...
" and manipulation of statistics by several nations came into focus, potentially undermining investor confidence. The focus has naturally remained on Greece due to its debt crisis. There have been reports about manipulated statistics by EU and other nations aiming, as was the case for Greece, to mask the sizes of public debts and deficits. These have included analyses of examples in several countries the United Kingdom, Spain, the United States, and even Germany.


Collateral for Finland

On 18 August 2011, as requested by the Finnish parliament as a condition for any further bailouts, it became apparent that Finland would receive
collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...
from Greece, enabling it to participate in the potential new support package for the Greek economy. Austria, the Netherlands, Slovenia, and Slovakia responded with irritation over this special guarantee for Finland and demanded equal treatment across the eurozone, or a similar deal with Greece, so as not to increase the risk level over their participation in the bailout. The main point of contention was that the collateral is aimed to be a cash deposit, a collateral the Greeks can only give by recycling part of the funds loaned by Finland for the bailout, which means Finland and the other eurozone countries guarantee the Finnish loans in the event of a Greek default. After extensive negotiations to implement a collateral structure open to all eurozone countries, on 4 October 2011, a modified escrow collateral agreement was reached. The expectation is that only Finland will utilise it, due, in part, to a requirement to contribute initial capital to
European Stability Mechanism The European Stability Mechanism (ESM) is an intergovernmental organization located in Luxembourg City, which operates under public international law for all eurozone member states having ratified a special ESM intergovernmental treaty. It ...
in one instalment instead of five instalments over time. Finland, as one of the strongest AAA countries, can raise the required capital with relative ease. At the beginning of October, Slovakia and Netherlands were the last countries to vote on the EFSF expansion, which was the immediate issue behind the collateral discussion, with a mid-October vote.Marsh, David
"German OK only small step in averting Greek crisis"
''MarketWatch'', 3 October 2011, 12:00 am EDT. Retrieved 3 October 2011.
On 13 October 2011 Slovakia approved euro bailout expansion, but the government has been forced to call new elections in exchange. In February 2012, the four largest Greek banks agreed to provide the €880 million in collateral to Finland to secure the second bailout programme. Finland's recommendation to the crisis countries is to issue
asset-backed securities An asset-backed security (ABS) is a security whose income payments, and hence value, are derived from and collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid asse ...
to cover the immediate need, a tactic successfully used in Finland's early 1990s recession, in addition to spending cuts and
bad bank A bad bank is a corporate structure which isolates illiquid and high risk assets (typically non-performing loans) held by a bank or a financial organisation, or perhaps a group of banks or financial organisations. A bank may accumulate a large po ...
ing.


Political impact

The handling of the crisis has led to the premature end of several European national governments and influenced the outcome of many elections: * Ireland – February 2011 – After a high deficit in the government's budget in 2010 and the uncertainty surrounding the proposed bailout from the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
, the
30th Dáil 3 (three) is a number, numeral and digit. It is the natural number following 2 and preceding 4, and is the smallest odd prime number and the only prime preceding a square number. It has religious or cultural significance in many soci ...
(parliament) collapsed the following year, which led to a subsequent general election, collapse of the preceding government parties,
Fianna Fáil Fianna Fáil (, ; meaning 'Soldiers of Destiny' or 'Warriors of Fál'), officially Fianna Fáil – The Republican Party ( ga, audio=ga-Fianna Fáil.ogg, Fianna Fáil – An Páirtí Poblachtánach), is a conservative and Christia ...
and the
Green Party A green party is a formally organized political party based on the principles of green politics, such as social justice, environmentalism and nonviolence. Greens believe that these issues are inherently related to one another as a foundation f ...
, the resignation of the
Taoiseach The Taoiseach is the head of government, or prime minister, of Ireland. The office is appointed by the president of Ireland upon the nomination of Dáil Éireann (the lower house of the Oireachtas, Ireland's national legislature) and the of ...
Brian Cowen and the rise of the
Fine Gael Fine Gael (, ; English: "Family (or Tribe) of the Irish") is a liberal-conservative and Christian-democratic political party in Ireland. Fine Gael is currently the third-largest party in the Republic of Ireland in terms of members of Dáil É ...
party, which formed a government alongside the Labour Party in the 31st Dáil, which led to a change of government and the appointment of
Enda Kenny Enda Kenny (born 24 April 1951) is an Irish former Fine Gael politician who served as Taoiseach from 2011 to 2017, Leader of Fine Gael from 2002 to 2017, Minister for Defence from May to July 2014 and 2016 to 2017, Leader of the Opposition fro ...
as Taoiseach. * Portugal – March 2011 – Following the failure of parliament to adopt the government austerity measures, PM José Sócrates and his government resigned, bringing about early elections in June 2011." * Finland – April 2011 – The approach to the Portuguese bailout and the EFSF dominated the April 2011 election debate and formation of the subsequent government. * Spain – July 2011 – Following the failure of the Spanish government to handle the economic situation, PM
José Luis Rodríguez Zapatero José Luis Rodríguez Zapatero (; born 4 August 1960) is a Spanish politician and member of the Spanish Socialist Workers' Party (PSOE). He was the Prime Minister of Spain being elected for two terms, in the 2004 and 2008 general elections. ...
announced early elections in November. "It is convenient to hold elections this fall so a new government can take charge of the economy in 2012, fresh from the balloting," he said. Following the elections,
Mariano Rajoy Mariano Rajoy Brey (; born 27 March 1955) is a Spanish politician who served as Prime Minister of Spain from 2011 to 2018, when a vote of no confidence ousted his government. On 5 June 2018, he announced his resignation as People's Party le ...
became PM. * Slovenia – September 2011 – Following the failure of June referendums on measures to combat the economic crisis and the departure of coalition partners, the Borut Pahor government lost a
motion of confidence A motion of no confidence, also variously called a vote of no confidence, no-confidence motion, motion of confidence, or vote of confidence, is a statement or vote about whether a person in a position of responsibility like in government or mana ...
and December 2011 early elections were set, following which Janez Janša became PM. After a year of rigorous saving measures, and also due to continuous opening of ideological question, the centre-right government of Janez Janša was ousted on 27 February 2013 by nomination of
Alenka Bratušek Alenka Bratušek (; born 31 March 1970) is a Slovenian politician. She was Prime Minister of Slovenia from March 2013 until May 2014, the first woman in Slovenia to hold this position. She was president ''pro tempore'' of the Positive Slovenia p ...
as the PM-designated of a new centre-left coalition government. * Slovakia – October 2011 – In return for the approval of the EFSF by her coalition partners, PM
Iveta Radičová Iveta Radičová (; born 7 December 1956) served as the first woman prime minister of Slovakia from 2010 to 2012. She led a coalition government, in which she also briefly held the post of Minister of Defence in the last five months of the coali ...
had to concede early elections in March 2012, following which Robert Fico became PM. * Italy – November 2011 – Following market pressure on government bond prices in response to concerns about levels of debt, the
right-wing Right-wing politics describes the range of Ideology#Political ideologies, political ideologies that view certain social orders and Social stratification, hierarchies as inevitable, natural, normal, or desirable, typically supporting this pos ...
cabinet Cabinet or The Cabinet may refer to: Furniture * Cabinetry, a box-shaped piece of furniture with doors and/or drawers * Display cabinet, a piece of furniture with one or more transparent glass sheets or transparent polycarbonate sheets * Filin ...
, of the long-time
Prime Minister A prime minister, premier or chief of cabinet is the head of the cabinet and the leader of the ministers in the executive branch of government, often in a parliamentary or semi-presidential system. Under those systems, a prime minister is ...
Silvio Berlusconi Silvio Berlusconi ( ; ; born 29 September 1936) is an Italian media tycoon and politician who served as Prime Minister of Italy in four governments from 1994 to 1995, 2001 to 2006 and 2008 to 2011. He was a member of the Chamber of Deputies f ...
, lost its majority: Berlusconi resigned on 12 November and four days later was replaced by the technocratic
government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government i ...
of
Mario Monti Mario Monti, (born 19 March 1943) is an Italian economist and academic who served as the Prime Minister of Italy from 2011 to 2013, leading a technocratic government in the wake of the Italian debt crisis. Monti served as a European Commi ...
. * Greece – November 2011 – After intense criticism from within his own party, the opposition and other EU governments, for his proposal to hold a
referendum A referendum (plural: referendums or less commonly referenda) is a Direct democracy, direct vote by the Constituency, electorate on a proposal, law, or political issue. This is in contrast to an issue being voted on by a Representative democr ...
on the austerity and bailout measures, PM George Papandreou of the PASOK party announced his resignation in favour of a national unity government between three parties, of which only two currently remain in the coalition. Following the vote in the Greek parliament on the austerity and bailout measures, which both leading parties supported but many MPs of these two parties voted against, Papandreou and
Antonis Samaras Antonis Samaras ( el, Αντώνης Σαμαράς, ; born 23 May 1951) is a Greek politician who served as 14th Prime Minister of Greece from 2012 to 2015. A member of the New Democracy party, he was its president from 2009 until 2015. Samaras ...
expelled a total of 44 MPs from their respective parliamentary groups, leading to PASOK losing its parliamentary majority. The early Greek legislative election, 2012 were the first time in the history of the country, at which the bipartisanship (consisted of PASOK and New Democracy parties), which ruled the country for over 40 years, collapsed in votes as a punishment for their support to the strict measures proposed by the country's foreign lenders and the Troika (consisted of the European Commission, the IMF and the European Central Bank). The popularity of PASOK dropped from 42.5% in 2010 to as low as 7% in some polls in 2012. The radical right-wing, extreme left-wing, communist and populist political parties that have opposed the policy of strict measures, won the majority of the votes. * Netherlands – April 2012 – After talks between the VVD, CDA and PVV over a new austerity package of about 14 billion euros failed, the Rutte cabinet collapsed. Early elections were called for 12 September 2012. To prevent fines from the EU – a new budget was demanded by 30 April – five different parties called the ''Kunduz coalition'' forged together an emergency budget for 2013 in just two days. * France – May 2012 – The
2012 French presidential election Presidential elections were held in France on 22 April 2012 (or 21 April in some overseas departments and territories), with a second round run-off held on 6 May (or 5 May for those same territories) to elect the President of France (who is a ...
became the first time since 1981 that an incumbent failed to gain a second term, when
Nicolas Sarkozy Nicolas Paul Stéphane Sarközy de Nagy-Bocsa (; ; born 28 January 1955) is a French politician who served as President of France from 2007 to 2012. Born in Paris, he is of Hungarian, Greek Jewish, and French origin. Mayor of Neuilly-sur-Se ...
lost to
François Hollande François Gérard Georges Nicolas Hollande (; born 12 August 1954) is a French politician who served as President of France from 2012 to 2017. He previously was First Secretary of the Socialist Party (France), First Secretary of the Socialist P ...
.


See also

* 2000s commodities boom *
Corporate debt bubble The corporate debt bubble is the large increase in corporate bonds, excluding that of financial institutions, following the financial crisis of 2007–08. Global corporate debt rose from 84% of gross world product in 2009 to 92% in 2019, or about $ ...
*
Crisis situations and unrest in Europe since 2000 This is a list of crises situations and major protests in countries of Europe since the year 2000. 2022 * Russian full-scale invasion of Ukraine starting from February 24, 2022. * 2022 energy crises in Europe * 2021–2022 Belarus–European ...
* Federal Reserve Economic Data *
Great Recession The Great Recession was a period of marked general decline, i.e. a recession, observed in national economies globally that occurred from late 2007 into 2009. The scale and timing of the recession varied from country to country (see map). At ...
* Great Recession in Europe *
List of acronyms associated with the eurozone crisis A ''list'' is any set of items in a row. List or lists may also refer to: People * List (surname) Organizations * List College, an undergraduate division of the Jewish Theological Seminary of America * SC Germania List, German rugby unio ...
* List of countries by credit rating * List of people associated with the eurozone crisis * The Intervention of ECB in the Eurozone Crisis


Notes


References


Further reading

* Copelovitch, M., Frieden, J., & Walter, S. (2016). The Political Economy of the Euro Crisis. Comparative Political Studies, 49(7), 811–840. * * Frieden, Jeffry and Stefanie Walter. 2017. " Understanding the Political Economy of the Eurozone Crisis." ''Annual Review of Political Science''. * * *
Markus K. Brunnermeier, Ricardo Reis. 2019. "A Crash Course on the Euro Crisis" NBER paper


External links


The EU Crisis Pocket Guide
by the
Transnational Institute The Transnational Institute (TNI), is an international non-profit research and advocacy think tank that was founded in 1974, Amsterdam, Netherlands. According to their website, the organization promotes a "... just, democratic and sustainable ...
in English (2012) – Italian (2012) – Spanish (2011)
Eurostat – Statistics Explained: Structure of government debt
(October 2011 data)
Interactive Map of the Debt Crisis
''Economist Magazine'', 9 February 2011

''New York Times'' topic page updated daily.
Budget deficit from 2007 to 2015
''Economist Intelligence Unit'' 30 March 2011
Stefan Collignon: Democratic requirements for a European Economic Government
Friedrich-Ebert-Stiftung, December 2010 (PDF 625 KB) * Wolf, Martin
"Creditors can huff but they need debtors"
''Financial Times'', 1 November 2011 7:28 pm.
More Pain, No Gain for Greece: Is the Euro Worth the Costs of Pro-Cyclical Fiscal Policy and Internal Devaluation?
Center for Economic and Policy Research The Center for Economic and Policy Research (CEPR) is a progressive American think tank that specializes in economic policy. Based in Washington, D.C. CEPR was co-founded by economists Dean Baker and Mark Weisbrot in 1999. Considered a lef ...
, February 2012
Michael Lewis-How the Financial Crisis Created a New Third World-October 2011
NPR, October 2011
Global Financial Stability Report
International Monetary Fund, April 2012


"Leaving the Euro: A Practical Guide" by Roger Bootle, winner of the 2012 Wolfson Economics Prize

Macroeconomic Policy Advice and the Article IV Consultations: A European Union Case Study
Center for Economic and Policy Research The Center for Economic and Policy Research (CEPR) is a progressive American think tank that specializes in economic policy. Based in Washington, D.C. CEPR was co-founded by economists Dean Baker and Mark Weisbrot in 1999. Considered a lef ...
, January 2013
Over Their Heads: The IMF and the Prelude to the Euro-zone Crisis
Paul Blustein, CIGI, March 2015 {{European Union topics, state=collapsed 2009 in economics 2010s economic history Economic crises Economy of the European Union Great Recession in Europe 2000s in the European Union 2010s in the European Union Eurozone Government debt Stock market crashes 2010 in economics 2010 in Europe 2011 in economics 2011 in Europe 2012 in economics 2012 in Europe 2013 in economics 2013 in Europe Articles containing video clips 2009 in the European Union 2010 in the European Union 2011 in the European Union 2012 in the European Union 2013 in the European Union