The origins of the sovereign debt crisis
The real story of the sovereign debt crisis in Europe is a system that basically broke down with the Financial Crisis in 2007-2009. The refinancing crisis currently experienced by some EU governments also has its origins in the business practices of European governments and international finance in pre-crisis times.
There are certainly many factors that currently hinder a recovery. After all, the European refinancing crisis has been with us for almost three years now. Part of the story is the lack of policy options at hand for national governments to adjust their economies in the currency union. While the ECB certainly has the interests of the whole of the Euro zone at heart, national governments struggle for leverage with regard to their ailing economies. A simple example: While interest rates on lending are still accounted for on a national basis and therefore borrowing costs for countries might increase or decrease individually, national governments don’t have the policy instruments and means at their disposal to effectively respond. In the Euro zone the final word on price stability and inflation vs. deflation rests with the European Central Bank. As stated on the website of the ECB: “The ECB’s definition of price stability makes clear that the focus of its monetary policy is on the euro area as a whole. This reflects its euro area-wide mandate. Therefore, price stability is assessed on the basis of price developments in the euro area economy.” Or in other words: No mandate to balance out the bumps of ailing economies in Southern Europe.
But while all these birth defects of the Euro zone might account for the persistence of the crisis, they still don’t explain the origins and severity of the current problems.
And here it is time to take a look at the business practices of European governments and the symbiotic relationship with international finance in the run-up to the meltdown of 2007/2008. Almost every European government was cooking their books by entering into deals with international finance on the basis of high risk financial instruments. The last part of a PBS frontline documentary on the Financial Crisis sheds light on the many deals made in the early 2000s between European public authorities on the one hand, and international finance on the other hand (Bear Stearns – later bought by JP Morgan – Merrill Lynch, Goldman Sachs to name just a few of the big players involved). Derivatives, credit default swaps and subprime mortgages were all part of the mix. Regulatory arbitrage and sometimes outright forgery was commonplace – and regulators, if they existed at all, were looking the other way.
Although this was not exactly sustainable and candid, it seemed as a viable way around the strict criteria, set by the Maastricht Treaty, such as: the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3%; and the ratio of gross government debt to GDP must not exceed 60%. Even regional and local governments and municipalities were involved in, and sometimes talked into, supposedly lucrative deals. International finance made money by packaging, selling and reselling precarious financial instruments across Europe, while public authorities secured low borrowing costs and rendered their book-keeping even more obscure. The opaqueness remained unquestioned. The system worked – until 2007/2008.
With the Financial Crisis going global, the combination of three developments gave birth to the European refinancing crisis: First, the meltdown of the financial system and its contagious effect to Europe and around the globe in some cases required massive bailouts by national governments for ailing banks, increasing already bloated budgets even further. Secondly, the toxic assets buried in the system, including in the books of public sector entities, came to light and proved immensely costly. Newly accumulating debt was the only logical consequence. Thirdly, international finance, in disbelief of the system’s failure, pulled out their money and confidence and, by doing so, made it even more difficult for governments to refinance themselves. Rating agencies, too lenient in pre-crisis times with regard to high risk financial instruments sought to regain their reputation as market overseers by tough ratings. The vicious circle of debt and more debt triggered a downward spiral for Greece, Ireland, Iceland and others.
In retrospect it is probably not an exaggeration to claim that some European governments have been gambling on their future – and they lost. However, this doesn’t absolve other European countries from responsibility. EU-imposed austerity and a lack of solidarity certainly also played their part in worsening conditions at least when it comes to Greece.
Not surprisingly, those who pay the price aren’t necessarily those who took bad decisions. Most decision-makers in politics and international finance seem to get away with little scrutiny. The fundamental injustice of the system stems from the fact that the crisis hits especially the most vulnerable. Most of these citizens never bought bonds or stocks, never participated in any significant way in the global economy and never speculated. However it is these people, the weakest link of any society, that are footing the bill for political incompetence and financial greed. Their frustration and anger is felt on the streets across Europe and populism makes its entree into parliaments across the continent.
Critical European 