Tuesday

26th Jan 2021

Magazine

2008-2009: The years that almost broke the euro

  • German chancellor Angela Merkel (left), then Greek prime minister Alexis Tsipras and then French president Francois Hollande discuss a compromise (Photo: The Council of the European Union)

The financial and economic crisis of 2007-2008, followed swiftly by the euro crisis of 2009-2010 and onwards, shook the world.

Some analysts declared the end of the euro, one of the most important symbols of Europe's unification.

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  • At one point, cash withdrawals by Greek citizens were limited to €60 per day (Photo: European Parliament)

The European Union wasn't ready to deal with both crises. The Great Recession plunged Europe into stagnation. Trillions of euros were lost.

Banks were collapsing because their system was built on garbage assets. Millions of people lost their house, their savings or their job.

Several European countries were unable to pay or refinance their government debt or bail out their banks.

Late in 2009, Greece announced that its budget deficits were higher than it had officially reported to the European Commission, and it was unable to control its deficit and its debt.

Under the protection of the euro, Greece had been able to finance its debt cheaply, compared with the sorry state of its finances in reality.

Credit agencies like Standard and Poor's lowered the Greek government's debt rating to "junk", making Athens' bonds useless.

As Greece was part of the eurozone, devaluation was not an option. But if Greece collapsed, the entire eurozone might collapse with it.

Then the same cracks started to appear in Cyprus, Ireland, Italy, Portugal and Spain.

The issue went to the core of the euro's infrastructure. Monetary policy was common, but fiscal policies remained with the member states, and common rules had been overlooked at times - even when broken by Germany and France.

A political problem quickly emerged as well: taxpayers in more fiscally-prudent countries felt it was unfair that they should finance what they saw as mistakes and overspending made by more fiscally-irresponsible governments.

Several governments, from Slovakia to Italy, fell as the EU struggled with its worst crisis to date.

Meanwhile, European leaders were not ready for the solution that would stop all speculation against the euro: a European banking union and European collateralisation of a part of the debt of each eurozone country.

That issue also provoked constitutional problems in Germany.

The European Central Bank (ECB) lowered interest rates so that people, businesses and countries could take loans at a low cost.

In May 2010, the European Commission introduced a European Financial Stability Facility in order to be able to give countries financial help where needed.

In January 2011, it also created the European Financial Stability Mechanism through which the European Commission would issue bonds, using the EU budget as collateral.

These bonds were immediately rated AAA+ by Standard and Poor's.

In July 2012, both mechanisms were fused into the European Stability Mechanism, a permanent rescue mechanism to help countries in need.

However, probably the most important intervention that stopped the collapse of the eurozone was a speech of the new ECB president Mario Draghi on 23 July 2012.

In that speech, Draghi calmed the market and stopped speculation against the euro by stating that the ECB would do "whatever it takes" to safeguard the common currency.

The restructuring of the euro remains ongoing, with plans to forge a banking union with common rules still on the negotiating table.

But the confidence in the euro has returned, and Estonia, Latvia and Lithuania have joined the common currency in the years since the financial crisis.

This article first appeared in EUobserver's latest magazine, 20 years of European journalism & history, which you can now read in full online.

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