The current crisis is a clear demonstration that in an increasingly interconnected global economy even local events can easily take on systemic, international importance. The crisis in the euro area originated in the financial debacle of 2007–2008, which was triggered by financial imbalances, regulatory failures and excessive risk-taking, mainly in the United States. Financial globalisation has brought substantial benefits, such as more efficient intermediation of savings and risk-pooling, but it has also made the global system more vulnerable.
The sovereign debt strains in the euro area reflect the impact of the financial crisis on some countries’ banking systems and public finances as well as pre-existing vulnerabilities, which for Italy consisted in slow growth and high public debt. Tensions were fuelled not only by the deteriorating outlook for the global economy but also by the worsening of Greece’s financial situation and the fears of contagion triggered by the announcement of the private sector involvement in the reduction of the country’s public debt.
Due to the euro area’s openness and financial interconnections, the crisis can have worldwide repercussions. The area is more open than other advanced economies. Its trade with the rest of the world has increased noticeably, owing in particular to growing exchanges with new EU Member States and the emerging economies.
The crisis risks leading to re-nationalisation of financial portfolios. The perceived risks are amplified by the uncertainty over the resolution of events that are in many respects unprecedented. The key is careful and timely analysis of each national economy and of the actors within them. The opportunities offered by financial diversification in a global environment are potentially intact. Ongoing reform efforts in the euro area countries aim at preserving their attractiveness for financial diversification.
The crisis has highlighted the weaknesses of EU and especially euro area governance. First, the Stability and Growth Pact failed to provide sufficient incentives to correct fiscal imbalances. Second, budgetary discipline alone could not avert the financial tensions generated by macro-economic imbalances. Third, the EU lacked a mechanism for managing systemic crises.