Eurozone Crisis (2009–2015): Greece, Bailouts and Austerity

The eurozone crisis was a sovereign debt crisis that threatened the survival of the European single currency between 2009 and 2015. It began in October 2009, when Greece’s new government revealed that its budget deficit was far larger than previously reported, and it spread to Ireland, Portugal, Spain, Italy and Cyprus. Greece received three international bailouts in return for harsh austerity measures, and its economy shrank by about a quarter; a dramatic standoff with its creditors in the summer of 2015 preceded the third.

Background: flaws in the euro

When the euro was introduced in 1999, member states gave up their own currencies and interest rate policy but kept control of their budgets. Rules limited deficits to 3 per cent of GDP and debt to 60 per cent, but they were weakly enforced. Markets treated the debt of all euro members as almost equally safe, and interest rates in southern Europe fell to near German levels.

Cheap credit fuelled different problems in different countries. In Ireland and Spain it fed property bubbles and banking excesses. In Greece, which joined the euro in 2001, it financed government borrowing, while competitiveness declined. Doubts about Greek statistics were long-standing: in 2004 a review found that Greece’s deficit had been above 3 per cent of GDP in the years used to judge its entry to the euro.

The global financial crisis of 2008 exposed these weaknesses. Recession cut tax revenues, governments rescued banks, and investors began to look closely at which states could repay their debts.

Greece’s hidden deficits

In the elections of 4 October 2009 George Papandreou’s PASOK party came to power. Within weeks the new government announced that the deficit for 2009 would be about 12.7 per cent of GDP, roughly double the previous estimate. It was later revised to more than 15 per cent. In January 2010 a report by Eurostat, the EU’s statistics office, sharply criticised the reliability of Greek fiscal data.

Credit rating agencies downgraded Greek bonds, and interest rates on Greek debt climbed rapidly. By the spring of 2010 Greece could no longer borrow at affordable rates. On 23 April 2010 Papandreou formally requested help from the EU and the International Monetary Fund.

The first bailouts

On 2 May 2010 Greece agreed a rescue package of 110 billion euros from eurozone countries and the IMF. The lenders, represented by the European Commission, the European Central Bank and the IMF, became known as the “troika”. In return Greece committed to deep spending cuts, tax rises and structural reforms. Protests followed, and on 5 May 2010 three bank employees died when a branch of Marfin Bank in Athens was set on fire during a demonstration.

To contain the crisis, eurozone governments created a temporary rescue fund, the European Financial Stability Facility, in May 2010. Ireland, whose government had guaranteed its failing banks, received a bailout of 85 billion euros in November 2010. Portugal followed with 78 billion euros in May 2011.

Contagion and the second Greek programme

The Greek programme soon fell behind its targets, as austerity deepened the recession and made the debt burden heavier relative to the shrinking economy. In 2011 European leaders accepted that Greece’s debt was unsustainable. In October 2011 Papandreou proposed a referendum on new measures, alarming his European partners; the plan was withdrawn, and he resigned in November. A technocrat, the former central banker Lucas Papademos, led a coalition government.

In February and March 2012 a second programme of about 130 billion euros was agreed, together with a restructuring of Greek bonds held by private investors. Bondholders accepted a cut of 53.5 per cent in the face value of their claims, reducing Greek debt by more than 100 billion euros, the largest sovereign debt restructuring in history at that time.

Meanwhile the crisis spread. Borrowing costs for Spain and Italy reached levels that threatened their ability to finance themselves, raising fears for the euro itself. Spain received European loans to recapitalise its banks in 2012.

Draghi’s promise

The turning point came from the European Central Bank. On 26 July 2012 its president, Mario Draghi, told an audience in London that the ECB was ready to do “whatever it takes to preserve the euro”. In September the bank announced a programme of Outright Monetary Transactions, offering to buy unlimited quantities of a country’s bonds if that government accepted a rescue programme. The scheme was never used, but the promise alone brought borrowing costs down sharply.

Governments also built new institutions. A permanent rescue fund, the European Stability Mechanism, began operating in October 2012. The Fiscal Compact tightened budget rules, and in 2014 the ECB took over supervision of the largest banks in a new banking union. Cyprus received a bailout in March 2013 that, unusually, imposed heavy losses on large bank deposits.

The 2015 showdown

By 2014 Ireland and Portugal had exited their programmes, but Greece remained in deep trouble. Its economy had shrunk by about 25 per cent since 2008, and unemployment had peaked at around 27 per cent in 2013, with youth unemployment above 50 per cent.

In January 2015 the left-wing Syriza party, led by Alexis Tsipras, won elections on a promise to end austerity. Its finance minister, the economist Yanis Varoufakis, sought to renegotiate the terms with creditors. Months of talks failed. On 27 June Tsipras called a referendum on the creditors’ proposals, and banks were closed and capital controls imposed from 29 June. On 30 June Greece failed to make a payment of about 1.5 billion euros to the IMF, becoming the first developed country to fall into arrears with the fund.

On 5 July 2015 about 61 per cent of Greek voters rejected the bailout terms. Varoufakis resigned the next day. Faced with the prospect of a disorderly exit from the euro, Tsipras accepted a deal at a eurozone summit on 12–13 July with conditions tougher than those voters had rejected. A third programme of up to 86 billion euros was approved in August 2015.

Consequences and legacy

The euro survived, and no country left the currency union. Greece completed its third programme in August 2018, but at great social cost: incomes, pensions and public services were cut sharply, and hundreds of thousands of mostly young Greeks emigrated. Greek public debt remained among the highest in the world.

The crisis changed the eurozone. It acquired a permanent rescue fund, a banking union and a central bank willing to act as a lender of last resort. It also deepened divisions between northern creditor states and southern debtor states, fuelled populist movements across Europe, and left a lasting debate among economists about whether austerity had deepened the downturn. The IMF itself later acknowledged that it had underestimated how much budget cuts would depress growth.

Timeline

• 2009, 4 October: PASOK wins the Greek election.
• 2009, October: The new government reveals a far larger deficit.
• 2010, 2 May: First Greek bailout of 110 billion euros agreed.
• 2010, November: Ireland receives a bailout.
• 2011, May: Portugal receives a bailout.
• 2012, March: Second Greek programme and private debt restructuring.
• 2012, 26 July: Mario Draghi promises to do whatever it takes.
• 2015, 25 January: Syriza wins the Greek election.
• 2015, 5 July: Greek voters reject the creditors’ terms in a referendum.
• 2015, August: A third Greek bailout of up to 86 billion euros is approved.

Why it matters

The eurozone crisis was the gravest test the single currency has faced. It revealed the dangers of a monetary union without common budget and banking institutions, transformed how the eurozone is governed and left deep economic and political scars in Greece and across southern Europe.