Abstract
The chapter provides an overview of the financial crisis in the euro-zone. First it examines the origins of the crisis, then recounts the EU-level steps taken to fight the crisis including the establishment of emergency funds, the interventions of the ECB as well as institutional changes. The second part of the chapter considers those paths which were not taken during the crisis management—the breakup of the euro-zone, the establishment of Eurobonds, or a transfer union. The main argument of the chapter is that in an attempt to balance considerations of moral hazard and solidarity during the management of the crisis, a strong divide opened between the North and the South of the EU, which presented a rather distrustful environment for crisis management.
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Notes
- 1.
Article 125(1) of the Treaty on the Functioning of the European Union asserts: “The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.” Text available: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT. Accessed: 2 July 2017.
- 2.
The acronym signals the troubled countries of the euro-zone, and includes Greece , Ireland , Portugal , and Spain . Cyprus is not included here as it joined the EU only in 2004. In Chap. 5 it will be included into the analysis.
- 3.
The origins of enormous liquidity during this period have been widely debated. A particularly influential explanation was the global savings glut hypothesis, which attributed low interest rates in the United States and possibly in other Western countries to excess savings in emerging economies (Bernanke 2005). However, when testing competing hypotheses, Bracke and Fidora (2008) found that loose monetary policies in developed countries carry more explanatory power. Shin (2012) attributes the liquidity to the leveraging and deleveraging cycle in the global banking system.
- 4.
The lowest interest rates could be observed in 2005—long-term interest rate stood at 3.4 percent in Germany and 3.6 percent in Greece , but they were still 6.6 percent in Hungary and 5.2 percent in Poland (European Commission 2017: 106–107).
- 5.
As the European Commission was unable to enforce fiscal discipline, Kopits (2017: 219–220) underlines that IMF surveillance of euro-area countries was also rather lax, and the fund seemed complacent given the low level of interest rates.
- 6.
The slogan is attributed to Margaret Thatcher, who used it to argue that there is no alternative to global capitalism and neoliberal policies. See Flanders (2013).
- 7.
On the relationship between the euro and structural reforms see the analysis by Duval and Elmeskov (2006).
- 8.
This mechanism is also discussed by Lane (2012): 52.
- 9.
The cases below will be discussed more in the depth in the following chapters.
- 10.
Unless noted otherwise, the following description is based on Kuenzel (2011).
- 11.
Data is from EMS website at: https://www.esm.europa.eu/about-us/history#context. Accessed: 2 July 2017.
- 12.
In 2016 gross public debt stood at €2147 billion in France and €2217 in Italy (AMECO database).
- 13.
See the announcement by Moody’s at: https://www.moodys.com/research/Moodys-changes-the-outlook-to-negative-on-Germany-Netherlands-Luxembourg--PR_251214. Accessed: 2 July, 2017.
- 14.
For a thorough discussion of the various programs of the ECB to manage the financial crisis, see Brunnermeier et al. (2016): 325–367.
- 15.
See the statement by ECB: http://www.ecb.europa.eu/press/pr/date/2013/html/pr130221_1.en.html. Accessed: 2 July 2017.
- 16.
See the transcript of the press conference where Mario Draghi announced the program: https://www.ecb.europa.eu/press/pressconf/2012/html/is120906.en.html. Accessed: 2 July 2017.
- 17.
Data is from ECB monthly bulletin available at: https://www.ecb.europa.eu/pub/pdf/other/mb201203_focus03.en.pdf?633af8e40f98a75808996a7857cbbd93. Accessed: 2 July 2017.
- 18.
While the numerous programs for assistance especially the bond-buying programs speak for themselves, there is a rather substantial controversy over whether the ECB has indeed overstepped its mandate. For an elaborate discussion on the debate, see Sinn (2014): 282–293.
- 19.
Unless noted otherwise, the source of the description of reforms is Kuenzel (2011).
- 20.
The Czech Republic, Hungary , Sweden, and the UK did not sign the pact mostly citing the infringement of national sovereignty as a reason.
- 21.
The procedure consists of the following ten indicators with indicative thresholds (Ecofin 2012):
-
1.
Three-year backward moving average of the current account balance in percent of GDP, with a threshold of +6 percent and −4 percent
-
2.
Net international investment position in percent of GDP, with a threshold of −35 percent
-
3.
Five-year percentage change of export market shares measured in values, with a threshold of −6 percent
-
4.
Three-year percentage change in nominal unit labor cost, with thresholds of +9 percent for euro-area countries and +12 percent for non-euro-zone countries, respectively
-
5.
Three-year percentage change of the real effective exchange rates based on HICP/CPI deflators, relative to 35 other industrial countries, with thresholds of −/+5 percent for euro-area countries and −/+11 percent for non-euro-area countries, respectively
-
6.
Private sector debt in percent of GDP with a threshold of 160 percent
-
7.
Private sector credit flow in percent of GDP with a threshold of 15 percent
-
8.
Year-on-year changes in the house price index relative to a Eurostat consumption deflator, with a threshold of 6 percent
-
9.
General government sector debt in percent of GDP with a threshold of 60 percent
-
10.
Three-year backward moving average of the unemployment rate, with a threshold of 10 percent
-
1.
- 22.
According to the Greenspan doctrine, which was the dominant approach toward bubbles prior to the crisis, bubbles do not exist; if they do, we do not see them while growing; if we did, we could not do anything; if we could, there would be more harm than benefit. For a more thorough discussion, see Mishkin (2011): 17–21.
- 23.
For an overview of performance, see Berg et al. (2004).
- 24.
Officially the Treaty on the Stability, Coordination, and Governance in the Economic and Monetary Union.
- 25.
Structural deficit means that deficit is calculated not from the actual but from the potential growth rate.
- 26.
- 27.
On the possible consequences of default, see Alcidi et al. (2012).
- 28.
A deeper analysis of the structural problems of Greece will be given in Chap. 4.
- 29.
Claessens et al. (2012) give a thorough overview about the different proposals.
- 30.
See, for example, the letter of 172 German economists in Frankfurter Allgemeine Zeitung on 5 July 2012. Available: http://www.faz.net/aktuell/wirtschaft/protestaufruf-der-offene-brief-der-oekonomen-im-wortlaut-11810652.html. Accessed: 2 July 2017.
- 31.
See Kilnes and Sherriff (2012) for an assessment of the positions on the budget.
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Győrffy, D. (2018). A Bird’s-Eye View of Crisis Management in the Euro-Zone. In: Trust and Crisis Management in the European Union. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-69212-8_2
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