The European Union’s Uncertain and Delayed Response to the Sovereign Debt Crisis: Economic and Political Explanations

The initial contagion in the Eurozone, after the sovereign debt crisis, and the subsequent double recession and weak recovery, that is, a substantial stagnation (see Chap. 5), were due not only to the fragile financial and macroeconomic situation, especially of peripheral countries, but also to the uncertain, delayed and inadequate economic policy response by the European Union (EU) institutions. For example, it is true that the spreads were continuously rising in 2010-2012 because of the ‘flight to quality’ of capital movements and the run from high-risk countries, at least until EcB President Draghi’s decisive step of the summer of 2012 (see Sect. 6.4), but a change in the mood of the markets could have happened much earlier with a timely policy reaction.1

Political uncertainties and communication errors worsened market expectations. In the spring of 2010, when it was clear that Greece could not save itself, the EU’s action was postponed not only because of legal problems (the no bailout clause included in the Maastricht Treaty) or economic ones (the moral hazard argument), but also for political reasons: the political situation in Germany meant that any decision was postponed until the completion of elections in some Lander.

Some measures were finally taken in early May 2010: some bilateral loans (worth 110 billion euros for 3 years, including 30 billion by the International Monetary Fund, iMF) were conceded to Greece, but they were not sufficient to counter the speculative attacks. A week later, the European Council decided the creation of a European Financial stability Facility (EFsF) to provide financial assistance - with loans at subsidised rates - to the countries at risk of default. At the same time, the European Central Bank (ECB) decided to purchase sovereign bonds on the secondary market through the Securities Market Programme (SMP). These purchases were accompanied by ‘sterilisation’ operations to prevent an increase in money supply. The sMP was initially directed at Greece, then at ireland and Portugal, and in 2011 at Italy and Spain (i.e. all countries under speculative attacks and rising spreads). The SMP concluded at the end of 2011.

In 2011 a new ‘permanent’ fund, the European Stability Mechanism (ESM) (see the next section) was proposed and then introduced. To be emphasised is that the bargaining process between the EU Commission and the EU Council, on the one hand, and among the member states

(within the Council) on the other, was complicated and annoying; it caused unjustified losses of time and further worsened the sovereign debt crisis. The conflicts among states concerned the size of the ‘save-States’ funds, their operation and, in particular, supervision by the EU institutions of the assisted countries. The speculative attacks were to a certain extent bolstered by the EU Council decision to make private owners responsible for the losses in case of default or debt restructuring.2 Although the principle was correct - similar to the ‘bail-in’ procedure adopted in 2016 in the case of banks’ default - the timing of the decision was wrong, since it was taken in the midst of the sovereign crisis.

In conclusion, we can state that EU policies have been delayed in some cases and inadequate in other circumstances; this is the criticised ‘too little too late’ approach. The monetary policy of the ECB has finally become sufficiently accommodative (as discussed in the next sections), but the fiscal stance has not substantially changed. The request to totally exclude public investments from the deficit definition (for the Stability and Growth Pact rules) has been rejected; even the ‘Juncker plan’ to stimulate public and private investment in the EU, which is a move in the right direction, is still too limited and its implementation has been too slow. This question will be treated in detail in the next chapter.

From a political perspective, we can add that the inadequate or delayed policy response by the EU institutions was also caused by a lack of trust of core Eurozone’s countries in the periphery, and vice versa. At the same time as the austerity policies were under attack in Greece, Spain and other peripheral countries - with some economic foundation as maintained in this book - governments and people in core countries refused to ‘pay for’ the lax and spendthrift governments of Southern Europe.3 Thus, the populist and anti-Europe movements frequently had opposite motivations in the two groups of countries: the EU was seen as an intrusive entity in the North and as a grim ‘stepmother’ in the South.

As we shall discuss in Chap. 7, the only way out from this dilemma - that has already ended in the ‘Brexit’ (because the problem is more pressing in the Eurozone but broadly concerns the EU) - is that an increasing solidarity among EU members should go hand in hand with the propagation of ‘good government’, that is, sound and efficient policy actions (if necessary with the implementation of more stringent controls). Regarding the financial risk, this means that risk sharing cannot be separated from risk reduction.

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