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“Countries like Greece caused the Eurozone crisis by running up too much debt, so it is only fair that they should bear most of the burden of fixing it.” Discuss. Josh Oakley The Eurozone Crisis was caused by an accumulation of debt that had taken place in several Eurozone member states since the end of 2009. This type of debt is the sovereign debt 60 . It was the inability to repay or refinance their government debt or bail-out banks that were over-indebted that caused the rising debt levels and resolutions that were Sovereign bailout programs, which were set-up to refinance and reduce debt levels in effected member states. This debt crisis began at the end of the Great Recession, where economic activity was low and subprime loan 61 losses were rising. European banks were making huge losses from the emergence of the shadow banking system 62 , such as, investment banks. With banks facing bankruptcy and a large- scale increase in public assistance from the government in the form of bail-outs, European debt grows. States that were affected by the crisis, faced vigorous rises in interest rate spreads for government bonds, due to the concerns about future debt sustainability for investors. These rises in interest rates made it hard for governments to pay back the bonds. Causes of the Eurozone crisis resulted from a combination of complex factors, such as, easy credit conditions which resulted in an excess amount of borrowing in the economy between 2002 and 2008. It encouraged high risk lending and borrowing practices. Another reason for the large government debt was when the government ran a structural deficit 63 where government spending exceeded revenue from Taxation over the trade cycle. The government spending included bail-out schemes for banks which added to government deficit, turn in, affecting in the financial crisis. Following on, another reason for the debt levels was the Keynesian fiscal stimulus during the recession, where expansionary fiscal policy added to debt levels. To fix the debt levels in Europe, sovereign bailout programs were set up jointly by the International Monetary Fund and European Commission with the additional support of the European Central Bank. Together they are called ‘The Troika’.
60 The amount of money the government owes to the holders of its government bonds. 61 A loan given to people who are less likely to be able to pay it off. 62 A non-depository firm or person that serves as a mediatory between savers and borrowers. 63 A permanent deficit that exist regardless of the point in the economic cycle
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