6The Crisis

of the
Eurozone
What went
wrong?
A financial
problem?
A fiscal problem?
A competitiveness
problem?
An integration
problem?
 Explaining the policy response
Intergovernmentalism v’s Neofunctionalism?
Social constructivism / public policy:

Problem has been (re-)constructed over time

Competing policy entrepreneurs
Policy framing linking problems with solutions
Response can be divided into a series of discursive
‘crises’
Feedback loops from policy failure and learning
 Crisis 1. ‘The liquidity crisis’
ECB as policy entrepreneur:

1. Interest rate cuts – cut to historic low of 1% (May 2009); now 0.05% (Sept
2014)
2.

3. Access to liquidity – massive expansion of cheap loans for banks,

including US dollar auction facilities
4.

5. Covered bond purchases (June 2009) – to reduce interest rates and

stimulate lending
6.

7. Securities Markets Programme (SMP) – ECB begins buying securities

(including sovereign bonds) on secondary markets
To counteract disruptions to the ‘monetary policy transmission
mechanism’. But fully ‘sterilised’: not Quantitative Easing.
 Crisis 2: ‘The fiscal crisis’
Policy entrepreneurs: Commission and alliance of northern
states (led by Germany) push for greater fiscal discipline

By late-2009 14/27 EU member states were in breach of the

SGP
By 2011 24/27 under the Excessive Deficit Procedure
Crisis 3: ‘The sovereign debt crisis’
Greek bailout (Mar 2010): €110bn
European Council (led by France and Germany) and IMF as
policy entrepreneurs

Germany:
IMF would play ‘substantial’ technical role
Bilateral loans will be at high rates of interest
Task force to propose strengthening of SGP

France:
Eurozone states will provide most of the funding
Commitment to ‘promote strong coordination of economic
policies’
 €750bn ‘shock and awe’ rescue package (Apr 2010):

1. European Financial Stability Facility (€440bn): funds

raised by bond issues guaranteed by all eurozone states in
proportion to paid-up funds at ECB (requires unanimity)
2.

3. European Financial Stabilisation Mechanism (€60bn):

funds raised by the Commission using EU budget as
collateral (requires QMV)
4.

5. International Monetary Fund (€250bn): provides funds

and technical support
Irish bailout (Nov 2010 – Dec 2013): €85bn
Portuguese bailout (May 2011 – May 2014): €78bn
Second Greek bailout (Mar 2012): €130bn plus over 50% ‘haircut’
on private bondholders
Spanish bank bailout (June 2012 – Jan 2014): up to €100bn for
bank recapitalisation
Cypriot bailout (Mar 2013): €10bn plus significant ‘haircut’ on
bondholders and deposits over €100,000
Third Greek bailout (July 2015): €86bn in return for reforms to
tax system, pensions, labour markets, administration, judiciary,
public spending cuts and privatisation programme

EFSF replaced by a permanent crisis mechanism from 2013:

European Stability Mechanism
 Super Mario
‘Within our mandate, the ECB is ready to do whatever it takes to
preserve the euro. And believe me, it will be enough’ (Draghi, July 2012)

Long Term Refinancing Operations (LTRO)

Dec 2011 (€489bn) and Feb 2012 (€530bn)
ECB accepts illiquid assets as collateral to provide cheap liquidity

Outright Monetary Transactions (OMT)

Aug 2012: ECB will purchase sovereign bonds on secondary markets
In exchange for strict conditionality on fiscal policy and economic reforms
Ruled illegal by German constitutional court, but overturned by ECJ
Never used but led to sharp decline in sovereign bond spreads

Asset purchase programme

Oct 2014: ECB begins buying covered bonds and asset-backed securities to inject
€1tn liquidity to increase household/business lending. Will not be ‘sterilised’ – QE in
all but name
Crisis 4: ‘The competitiveness crisis’
‘The balance of payments crisis’
 Pact for the euro (March 2011)
Enhanced surveillance of wages and productivity
National ‘debt brake’ laws
Opening of protected sectors
The ‘6 pack’ reforms (Sept 2011)
New procedures (RQMV) for sanctioning debt offenders
Interest bearing deposit (0.1% GDP)
Surveillance of macroeconomic imbalances, including the current account
Treaty on Stability, Coordination and Governance (March 2012)
IG agreement of 25 states and binding for all Eurozone states
Fiscal Compact: balanced budget in medium term, defined as a structural deficit of
no more than 0.5% of GDP (1.0% of GDP for states with debt below 60% of GDP)
Reinforced surveillance and coordination of economic policies through ex ante
coordination of debt issuance plans and Economic Partnership Programmes
(structural reforms)
 The price of ‘internal devaluation’

Afonso, A. (2019) ‘State-led wage devaluation in Southern Europe in the wake of the Eurozone crisis’, European Journal of Political Research.
 Crisis 5: ‘The banking crisis’
Not a problem of public debt…

Matthijs, M. and Blyth, M. (2017) ‘When Is It Rational to Learn the Wrong Lessons? Technocratic Authority, Social
Learning, and Euro Fragility’, Perspectives on Politics 16(1)
…but of private debt
Banking Union

Single Supervisory Mechanism (SSM), 2013

ECB to provide direct supervision for 130 largest banks in
the Eurozone
Non-eurozone states can opt-in: UK and Sweden will not

Single Resolution Mechanism (SRM), 2014

ECB can close Eurozone banks over a weekend against MS
wishes
€55bn resolution fund to be built up over 8 years
But no mutual liability: MSs will not jointly cover cost of
bank failure or protection of deposits
Bank Resolution and Recovery Directive (Dec 2013):
introduces ‘bail in’ rules for whole of EU
Post-crisis Eurozone: Work in
progress?
 Five Presidents Report (June 2015)
A plan for completing EMU in three stages by 2025

1. Economic union: new Eurozone System of Competitiveness Authorities

2. Financial union: European Deposit Insurance Scheme and Capital Markets
Union
3. Fiscal union: New advisory European Fiscal Board
4. Political Union: Enhanced democratic accountability and legitimacy
 The Macron moment?
‘Initiative for Europe’ (Sept 2017)

A common Eurozone budget

Eurozone tax harmonisation
Financial Transactions Tax
A Eurozone Finance Minister
A Eurozone Parliament
 Pie in
the sky?
 Problem: The fiscal disciplinarians

See: Lehner, T. and Wasserfallen, F. (2019) ‘Political conflict in the reform of the Eurozone’, European Union Politics
https://blogs.lse.ac.uk/europpblog/2019/01/21/mapping-the-conflict-between-eu-member-states-over-reform-of-the-eurozone/
Hanseatic League 2.0?

Single market in
services
Capital Markets Union
European Monetary
Fund
Stronger fiscal
surveillance
No fiscal transfers
Covidonomics
EU Recovery Instrument
Next Generation EU

July 2020: €750bn Recovery Fund created to assist eurozone economies

€350bn of grants + €390bn as loans
Funds raised by Commission borrowing using EU budget as collateral
BUT
Conditionality: to access the Recovery and Resilience Facility, MSs must
submit national recovery plans detailing how they will reform economies
Governance: a MS can temporarily block the distribution of funds, but
Commission has final say
Own Resources: environmental levies, digital tax?
Are these fiscal transfers??
ECB Pandemic Emergency
Purchase Programme

Lagarde replaces Draghi in July 2019

PEPP = €1350bn asset purchases (+
€500bn in Dec)
2021 Strategy Review revises
inflation mandate to ‘2%’
ECB Transmission Protection
Mechanism agreed in July 2022 to
permit greater flexibility in sovereign
bond purchases
Europe’s Hamiltonian
moment?