The Euro Crisis — A Tear in the Fabric of Integration

In the autumn of 2009, a single confession shook Europe. The newly installed Greek prime minister, George Papandreou, revealed that his country’s fiscal deficit was far greater than the figures previously published. The deficit eventually disclosed for 2009 came to roughly 12.7 percent of GDP — nearly double the earlier estimate.

The number itself was a shock, but the real problem lay in its meaning. Greece was a country that used the common currency, the euro. A crisis arising in one country’s finances could spread to all the partners that shared the euro, and on to the very foundation of monetary union. Behind the story of enlargement in the previous episodes, the EU was now pressing on into its deepest trial since its founding — days in which cohesion itself was put to the question.

The Hidden Deficit

Why had things grown so serious? One thread had been embedded in the very mechanism of the euro itself.

In the eurozone, monetary policy — the setting of interest rates — was held entirely by the European Central Bank (ECB), while fiscal policy — the decisions on taxes and spending — remained in the hands of each country. As this series has touched on before, this structure of ‘a shared currency but national finances’ is said to have carried a latent risk from the start. Countries that could borrow at rates lower than their true standing warranted, under the credit of the common currency, found it easy to let their debts swell.

In Greece’s case, this weakness was compounded by the problem that the true state of its finances had long gone undisclosed accurately. When the issue of statistics bordering on falsification came to the surface, the market’s confidence collapsed all at once. Investors sold Greek government bonds, and interest rates leapt. As the cost of borrowing money swelled, the country found itself ever more strapped to repay. The crisis spread to other countries of Southern Europe, and Ireland, Portugal, Spain, and Cyprus too each came to face their own serious fiscal and financial difficulties.

The North-South Confrontation Over Austerity

To let Greece default would shake the whole euro. Judging so, the EU set out to rescue it together with the IMF (International Monetary Fund). In May 2010, the European Commission, the ECB, and the IMF provided Greece with a first round of support totaling roughly 110 billion euros.

The support, however, came with harsh conditions. These were painful ‘austerity measures’: cuts to pensions and public-sector wages, tax increases, and the sale of state assets. The supporting side — especially the northern countries such as Germany, which prized fiscal soundness — believed that the bill for profligate finances should be settled responsibly by the country concerned.

But the people of the South, who were asked to bear austerity, received it differently. Wages fell, the unemployed swelled, and social security was cut away. Why should we alone be forced to make such sacrifices? Protests and strikes against austerity were repeated in many places. On the supporting side, too, discontent smoldered: why should we cover another country’s debts with our own citizens’ taxes? Thus the crisis transformed into a confrontation that tore the eurozone along a North-South line. A question of public finances had become a question that tested the very solidarity of Europe.

The Single Phrase ‘Whatever It Takes’

The waves of the crisis came back again and again. A second round of support was arranged for Greece, and still the market’s unease did not fully subside. Might the euro itself break apart? Might some countries leave the currency union? Such speculation repeatedly rattled the markets.

The turning point came in July 2012. ECB President Mario Draghi, in a speech in London, said this: within its mandate, the ECB was ready to do whatever it takes to preserve the euro. And, he added, it would be enough. These words came to be widely remembered as the phrase that later turned the tide of the crisis.

Soon after, the ECB set out a framework — the OMT (Outright Monetary Transactions) program — for buying up the government bonds of countries in crisis on the market. What is intriguing is that this mechanism, in the end, was never actually used. Merely by signaling a strong resolve that ‘if it comes to it, the central bank will step in to buy’, the market’s excessive unease eased, and the bond yields that had leapt up settled down. Words moved reality.

The Days When Cohesion Was Tested

Even so, Greece’s plight continued. In 2015, on the back of a backlash against austerity, the left-wing Syriza government was born, and Prime Minister Alexis Tsipras put the question of whether to accept the support terms directly to the people. In the referendum of 5 July, Greek voters chose ‘no’ to the bailout terms by a majority.

Yet what followed was not so simple. To remain in the eurozone, an agreement with the creditors was, in the end, unavoidable. Caught between the popular will the vote had expressed and the constraints of reality, the Tsipras government ultimately accepted a new support package. The ‘no’ of the referendum and the ‘agreement’ the government chose — this discrepancy symbolically reflected just how sharply the logic of democracy and the logic of monetary union clashed amid the crisis.

After numerous rescues and rounds of austerity, and the ECB’s extraordinary response, the euro escaped fragmentation and survived. The Greek exit some had spoken of at first — the so-called ‘Grexit’ — did not come to pass in reality either. In that sense, one can say that integration overcame the crisis. But the price was no small thing.

The euro survived. But what those years of crisis left behind was not only fiscal wounds. The discontent of the South, forced into austerity; the discontent of the North, made to feel it was footing the bill; and the unease of having one’s own way of life decided in a distant Brussels or Frankfurt. Behind the reassurance that integration was supposed to bring, a doubt about the EU had begun to sprout in people’s hearts. The crisis quietly nurtured the people’s distrust of the EU.