07 September 2015

VoxEU: Towards a consensus on the causes of the eurozone crisis

The ultimate causes of the eurozone crisis were policy failures that allowed the imbalances to get so large, a lack of institutions to absorb shocks at the eurozone level, and poor crisis management.

The Eurozone Crisis which broke out in May 2010 is half a decade-old and a long way from finished. Mainstream forecasts predict that hundreds of millions of Europeans will miss out on the opportunities that past generations took for granted. The burden is falling hardest on Europe’s youth (Commission 2015).

But this is no longer just an economic crisis. The economic hardship has fuelled populism and political extremism. In a social and international setting that is more unstable than any time since the 1930s, anti-European rhetoric is becoming mainstream. Parties arguing for breaking up the Eurozone and the EU are no longer found only in the political fringe.

Worse yet, there is a widespread belief that the fragilities and imbalances that primed the monetary union for this crisis are still present.

As a first step to finding a broad consensus on what more needs to be done, we gathered essays from 20 world-renown economists on a simple question:

• “What caused the Eurozone Crisis?”

A consensus emerges: It was a ‘sudden stop’, not a public debt crisis

Although the essays were largely uncoordinated – and the authors have diverse backgrounds – a remarkably coherent message emerges from this collection of essays.

• Excessive, cross-border foreign lending and borrowing among eurozone members in the pre-crisis years – much of which ended up in non-trade sectors – was why Greece’s 2009 deficit deceit could trigger such a massive crisis.

At its core, this as a classic ‘sudden stop’ crisis – not a public debt crisis.

Some of the intra-eurozone lending and borrowing in the 2000s went to private borrowers (especially in Ireland and Spain) and some to public borrowers (especially in Greece and Portugal). When trust evaporated in 2010 and 2011, most of it ended up in governments’ hands. As eurozone governments cannot devalue or force their central bank to finance public debt, eurozone members who relied heavily on foreign lending had to be bailed out. 

The ultimate causes of the eurozone Crisis were thus:

• Policy failures that allowed the imbalances to get so large;
• Lack of institutions to absorb shocks at the eurozone level; and
• Crisis mismanagement.

Full article on VoxEU

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