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The Eurozone Crisis — 2009 to 2015

What Caused the Eurozone Crisis

Explain the main explanations of the euro area crisis, who holds each, and why the causes are still argued over.

Before you start

What you'll be able to answer

  1. What do those who blame government borrowing point to, and what do those who blame private debt point to?
  2. Why do some blame the design of the euro, and others the way the crisis was handled?
  3. Why are the causes of the crisis still argued over?

Where this sits

The Eurozone Crisis — 2009 to 2015 · this module is lit

  1. 21 Oct 2009Greece revises its 2009 deficit figure sharply upward
  2. May 2010Euro area governments and the IMF agree Greece's first rescue loan, EU governments agree to create rescue funds, and the ECB starts buying government bonds
  3. 28 Nov 2010Ireland agrees a rescue programme
  4. May 2011Portugal agrees a rescue programme
  5. Dec 2011 and Feb 2012The ECB makes two rounds of three-year loans to banks
  6. Mar to Apr 2012Private holders of Greek bonds take a cut of more than half in face value
  7. 20 Jul 2012Euro area ministers approve a loan to rebuild the capital of Spain's banks
  8. 26 Jul and 6 Sep 2012The ECB's president promises "whatever it takes"; the ECB announces a plan to buy struggling governments' bonds
  9. Mar to Apr 2013Cyprus takes rescue loans, while uninsured depositors, shareholders and bondholders meet the capital needs of Cyprus Popular Bank and the Bank of Cyprus
  10. Jun to Jul 2015Greece shuts its banks as savers rush to withdraw money, voters reject the lenders' terms, and euro area leaders agree to move towards a third programme

1 January 1999

On 1 January 1999 eleven European Union countries adopted a single currency, the euro, and handed the setting of their interest rates to the European Central Bank (ECB), the central bank for the euro area, the countries that share the euro. Greece joined in 2001. Countries on the euro area's southern and western edge, such as Spain, Portugal and Greece, had paid more to borrow than Germany. As they prepared for the euro, the extra they paid fell sharply, nearly to Germany's level, the US Congressional Research Service (CRS) reported.

Predict first

Borrowing had become much cheaper for countries such as Spain, Portugal and Greece. What do you think happened next?

Cheap credit came in, and debts rose

The countries on the euro area's edge took advantage of the cheap credit, the CRS says, but money flowing in from abroad was not always put into investments that could earn enough to repay it, so their debts rose. Much of it was lent by banks elsewhere in the euro area, especially German and French ones. In some countries the government did most of the borrowing; in others, households, firms and banks did.

Why the crisis followed is still argued: some stress government borrowing, some private debt built on cheap credit, some a currency shared without a shared budget, and some how the crisis was handled.

Some blame government borrowing

Some economists blame failures in individual countries, such as weak budget discipline, reports the Independent Evaluation Office, the evaluators of the International Monetary Fund (IMF), which lends to countries in trouble. The CRS says government debt was the most problematic kind in Greece, Portugal and Italy. A government's deficit is the gap between its spending and its tax income in one year; its debt is the total owed from every year of borrowing. Greece was accused of mismanaging its finances, Portugal ran deficits year after year, and Italy's debt was above its GDP, the value of everything a country produces in a year.

EU rules were meant to keep deficits in check, but Germany and France led a push in 2003 to avoid penalties for their own deficits, making it easy for others to delay, says the history of the European Stability Mechanism (ESM), the euro area's permanent rescue fund.