From Macroeconomic Imbalances to the Greek Sovereign Debt
Problem: a Cascade of Ideas about the Euro crisis and EMU
Reform
,Table of Contents
Introduction 3
Causes of the Euro crisis: Different Perspectives 3-6
How do scholars think about the German position towards the Greek sovereign debt
problem? 6-8
Ideas on Reform of the EMU 8-11
-Banking Union 8-9
-European Semester 9-10
-Macroeconomic Imbalance Procedure 10-11
Conclusion 11-12
Bibliography 13
2
,Introduction
Did macroeconomic imbalances cause the Euro crisis, was the design of the
Economic and Monetary Union (EMU) a recipe for failure or did the Greek sovereign
debt problem play a crucial role in the developing of the turbulence of the European
economies? These questions have occupied various scholars and academics since
the start of the Euro crisis in 2008/2009. This survey article tries to answer the
following research question: How do various economists think about the causes of
the Euro crisis and the subsequent EMU reforms? The paper includes two sections
that are divided into paragraphs. The first section will cover the ideas of academists
about the Euro crisis. The first paragraph of this section will examine how academics
perceive the Euro crisis as a whole. This approach provides a broader context for the
topic before the subsequent paragraph delves into a more specific aspect of the
crisis: Germany’s stance towards the Greek sovereign debt problem. The second
section will focus on EMU reforms in response to the crisis. Given the large scale of
the reforms introduced after the Euro crisis, this article will focus on a few of these
reforms, namely the Banking Union, the European Semester, and the
Macroeconomic Imbalance Procedure. The survey article will be based on a
systematic analysis of academic articles and relevant handbooks. Therefore, the
research method will be to compare these sources, and to examine which topics are
most frequently discussed, as well as the different opinions and the arguments used
to defend these positions. These arguments are then weighed against each other in
order to gain a deeper understanding of the debates surrounding the Euro crisis and
the subsequent reforms of the Eurozone. Special attention will be given to Germany’s
position in these debates, exploring how its stance on Greece’s sovereign debt
problem was justified and how it was perceived by academics. Finally, the article will
evaluate key Eurozone reforms introduced in response to the crisis, considering how
these reforms were received by economists and whether they adequately addressed
the structural challenges exposed by the crisis.
Causes of the Euro crisis: Different Perspectives
Breuss argues that the Eurozone did not face one crisis, but was hit by two crises,
namely first the global financial crisis of 2008/2009 and secondly the Euro crisis. In
his eyes, the best summary of the global financial crisis was given by the ‘’Financial
Crisis Inquiry Commission’’ in 2011. This committee described the crisis as follows:
‘’It was the collapse of the housing bubble - fuelled by low interest rates, easy and
available credit, scant regulation, and toxic mortgages - that was the spark that
ignited a string of events, which led to a full-blown crisis in the fall of 2008. Trillions of
dollars in risky mortgages had become embedded throughout the financial system,
as mortgage-related securities (CDOs) were packaged, repackaged, and sold to
investors around the world. When the bubble burst, hundreds of billions of dollars in
losses in mortgages and mortgage-related securities shook markets as well as
financial institutions that had significant exposures to those mortgages and had
borrowed heavily against them. This happened not just in the United States but
around the world. The losses were magnified by derivatives such as synthetic
3
, securities. The crisis reached seismic proportions in September 2008 with the failure
of Lehman Brothers and the impending collapse of the insurance giant American
International Group (AIG). Panic fanned by a lack of transparency of the balance
sheets of major financial institutions, coupled with a tangle of interconnections among
institutions perceived to be ‘’too big to fail,’’ caused the credit markets to seize up.
Trading ground to a halt. The stock market plummeted. The economy plunged into a
deep recession.’’ The causes of the Euro crisis are multifaceted and closely related to
the structural weaknesses within the EMU, with one of the key factors being the
systemic weaknesses in its governance. The EMU had a centralized monetary policy
through the European Central Bank (ECB), while fiscal policy remained a task of the
member states. This arrangement worked well during the stable period from 1999 to
2008, yet it proved inadequate in times of crisis. The EMU lacked sufficient crisis
management tools, making it difficult to respond quickly and effectively when the
crisis emerged. There were no pre-established instruments for managing a crisis of
this magnitude, leading to reactive measures such as the creation of the European
Stability Mechanism (ESM) to stabilize the situation. Another important factor was the
misperception of sovereign default risks. After the establishment of the euro,
peripheral countries, such as the PIIGS (Portugal, Italy, Ireland, Greece, Spain),
benefited from artificially low interest rates determined by the German rates. This
convergence of government bond yields led to a misjudgment of the risks of
sovereign defaults. Rating agencies regarded the bonds of peripheral countries as
equally low-risk as those of Germany, which, combined with the lower interest rates,
gave these countries a stronger incentive to borrow more, ultimately contributing to
the buildup of debt.1 Frieden and Walter generally support this view, while also
highlighting the role of investor expectations in the crisis. Many assumed that
stronger Eurozone members would bail out struggling economies, which created a
moral hazard problem that encouraged excessive borrowing by peripheral countries.
This was particularly noticeable with Greece. No one realistically saw Greece as a
credit risk similar to Germany, but people expected that if Greece faced financial
problems, Germany and other stronger countries would step in to help. As a result,
Greece was able to borrow at very low interest rates, which encouraged the
government to borrow too much.2
In 2012, the then president of the European Commission, José Manuel Durão
Barroso, identified three main causes of the Euro crisis: excessive public debt, a
decline in competitiveness in certain member states, and reckless financial sector
behavior. Before the crisis, many Eurozone countries had stabilized their public debt.
However, peripheral countries, particularly Greece, entered the crisis with debt levels
far exceeding the EU’s Maastricht target of 60% of GDP. The revelation of
underreported fiscal deficits in Greece in 2009, where the Greek deficit was much
larger than previously reported, triggered a loss of confidence and sparked the Euro
1Frits Breuss, “The Crisis in Retrospect: Causes, Effects and Policy Responses,” in Routledge
Handbook of the Economics of European Integration, ed. Harald Badinger and Volker Nitsch (London
and New York: Routledge, 2016), 3-8.
2Jeffry Frieden and Stefanie Walter, “Understanding the Political Economy of the Eurozone
Crisis,” Annual Review of Political Science 20, no. 1 (2017): 372-377, https://doi.org/10.1146/annurev-
polisci-051215-023101.
4
Problem: a Cascade of Ideas about the Euro crisis and EMU
Reform
,Table of Contents
Introduction 3
Causes of the Euro crisis: Different Perspectives 3-6
How do scholars think about the German position towards the Greek sovereign debt
problem? 6-8
Ideas on Reform of the EMU 8-11
-Banking Union 8-9
-European Semester 9-10
-Macroeconomic Imbalance Procedure 10-11
Conclusion 11-12
Bibliography 13
2
,Introduction
Did macroeconomic imbalances cause the Euro crisis, was the design of the
Economic and Monetary Union (EMU) a recipe for failure or did the Greek sovereign
debt problem play a crucial role in the developing of the turbulence of the European
economies? These questions have occupied various scholars and academics since
the start of the Euro crisis in 2008/2009. This survey article tries to answer the
following research question: How do various economists think about the causes of
the Euro crisis and the subsequent EMU reforms? The paper includes two sections
that are divided into paragraphs. The first section will cover the ideas of academists
about the Euro crisis. The first paragraph of this section will examine how academics
perceive the Euro crisis as a whole. This approach provides a broader context for the
topic before the subsequent paragraph delves into a more specific aspect of the
crisis: Germany’s stance towards the Greek sovereign debt problem. The second
section will focus on EMU reforms in response to the crisis. Given the large scale of
the reforms introduced after the Euro crisis, this article will focus on a few of these
reforms, namely the Banking Union, the European Semester, and the
Macroeconomic Imbalance Procedure. The survey article will be based on a
systematic analysis of academic articles and relevant handbooks. Therefore, the
research method will be to compare these sources, and to examine which topics are
most frequently discussed, as well as the different opinions and the arguments used
to defend these positions. These arguments are then weighed against each other in
order to gain a deeper understanding of the debates surrounding the Euro crisis and
the subsequent reforms of the Eurozone. Special attention will be given to Germany’s
position in these debates, exploring how its stance on Greece’s sovereign debt
problem was justified and how it was perceived by academics. Finally, the article will
evaluate key Eurozone reforms introduced in response to the crisis, considering how
these reforms were received by economists and whether they adequately addressed
the structural challenges exposed by the crisis.
Causes of the Euro crisis: Different Perspectives
Breuss argues that the Eurozone did not face one crisis, but was hit by two crises,
namely first the global financial crisis of 2008/2009 and secondly the Euro crisis. In
his eyes, the best summary of the global financial crisis was given by the ‘’Financial
Crisis Inquiry Commission’’ in 2011. This committee described the crisis as follows:
‘’It was the collapse of the housing bubble - fuelled by low interest rates, easy and
available credit, scant regulation, and toxic mortgages - that was the spark that
ignited a string of events, which led to a full-blown crisis in the fall of 2008. Trillions of
dollars in risky mortgages had become embedded throughout the financial system,
as mortgage-related securities (CDOs) were packaged, repackaged, and sold to
investors around the world. When the bubble burst, hundreds of billions of dollars in
losses in mortgages and mortgage-related securities shook markets as well as
financial institutions that had significant exposures to those mortgages and had
borrowed heavily against them. This happened not just in the United States but
around the world. The losses were magnified by derivatives such as synthetic
3
, securities. The crisis reached seismic proportions in September 2008 with the failure
of Lehman Brothers and the impending collapse of the insurance giant American
International Group (AIG). Panic fanned by a lack of transparency of the balance
sheets of major financial institutions, coupled with a tangle of interconnections among
institutions perceived to be ‘’too big to fail,’’ caused the credit markets to seize up.
Trading ground to a halt. The stock market plummeted. The economy plunged into a
deep recession.’’ The causes of the Euro crisis are multifaceted and closely related to
the structural weaknesses within the EMU, with one of the key factors being the
systemic weaknesses in its governance. The EMU had a centralized monetary policy
through the European Central Bank (ECB), while fiscal policy remained a task of the
member states. This arrangement worked well during the stable period from 1999 to
2008, yet it proved inadequate in times of crisis. The EMU lacked sufficient crisis
management tools, making it difficult to respond quickly and effectively when the
crisis emerged. There were no pre-established instruments for managing a crisis of
this magnitude, leading to reactive measures such as the creation of the European
Stability Mechanism (ESM) to stabilize the situation. Another important factor was the
misperception of sovereign default risks. After the establishment of the euro,
peripheral countries, such as the PIIGS (Portugal, Italy, Ireland, Greece, Spain),
benefited from artificially low interest rates determined by the German rates. This
convergence of government bond yields led to a misjudgment of the risks of
sovereign defaults. Rating agencies regarded the bonds of peripheral countries as
equally low-risk as those of Germany, which, combined with the lower interest rates,
gave these countries a stronger incentive to borrow more, ultimately contributing to
the buildup of debt.1 Frieden and Walter generally support this view, while also
highlighting the role of investor expectations in the crisis. Many assumed that
stronger Eurozone members would bail out struggling economies, which created a
moral hazard problem that encouraged excessive borrowing by peripheral countries.
This was particularly noticeable with Greece. No one realistically saw Greece as a
credit risk similar to Germany, but people expected that if Greece faced financial
problems, Germany and other stronger countries would step in to help. As a result,
Greece was able to borrow at very low interest rates, which encouraged the
government to borrow too much.2
In 2012, the then president of the European Commission, José Manuel Durão
Barroso, identified three main causes of the Euro crisis: excessive public debt, a
decline in competitiveness in certain member states, and reckless financial sector
behavior. Before the crisis, many Eurozone countries had stabilized their public debt.
However, peripheral countries, particularly Greece, entered the crisis with debt levels
far exceeding the EU’s Maastricht target of 60% of GDP. The revelation of
underreported fiscal deficits in Greece in 2009, where the Greek deficit was much
larger than previously reported, triggered a loss of confidence and sparked the Euro
1Frits Breuss, “The Crisis in Retrospect: Causes, Effects and Policy Responses,” in Routledge
Handbook of the Economics of European Integration, ed. Harald Badinger and Volker Nitsch (London
and New York: Routledge, 2016), 3-8.
2Jeffry Frieden and Stefanie Walter, “Understanding the Political Economy of the Eurozone
Crisis,” Annual Review of Political Science 20, no. 1 (2017): 372-377, https://doi.org/10.1146/annurev-
polisci-051215-023101.
4
