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Jerome Torossian

Dr. Avdeyeva

PLSC 347

9 April, 2015

The EU Economic Crisis

When someone decides to explore the history of the European Union, as well as the

progression of the European integration, it is inevitable that the individual in question will

encounter times when the Union became in crisis. Indeed, the European Union has found itself in

many difficult situations such as the failure of the European Defense Community Treaty in 1954,

the ‘empty chair’ crisis in 1965, the Danish ‘no’ vote against the Maastricht Treaty in 1992, and

the non-successful Treaty establishing a Constitution for Europe in 2004. In any of these

situations, the European Union has always found a compromise in order to overcome these states

of emergencies. During the 2007-2008 periods, the European Union has found itself in the worst

economic crisis in its history. This period is often considered by many economists as one of the

biggest financial and economic crisis since the great depression of the 1930s. The economic

crisis has brought many different ideas to the table and has greatly changed the situation of the

European Union. In this essay, I will mainly explain the foundations of recent EU economic

crises, and discuss which countries are responsible for it. Furthermore, I will talk about how the

European Union has responded to this dark chapter of its history. Finally, I will argue on whether

or not I believe that the European Union strategies to combat the crises are successful.

The 2007-2008 crises started in the United States of America, and were caused by

excessive household debt, deceleration, and the fall in property prices. This situation was mainly

developed because of the US subprime mortgage market. According to the Research and Studies

Center on Europe, the Fondation Robert Schuman, subprime mortgages are “a type of loan which

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facilitates access to housing by those who do not have the necessary guarantees to be eligible for

ordinary loans.” These types of loans represented 10% of the American mortgage market in

2006. In fact, the issue was that the US low-income households had difficulties to repay the

subprimes that had been granted to them for the purchase of their home. These loans granted by

financial institutions were for households that did not have sufficient guarantees. These

individuals in need were not only in a risky credit situation, but also in a mortgage problem

because the household’s properties were used as collateral in case of default. The low-interest

rates at the beginning of the loan resulted in over-indebtedness of US households with low

incomes. Consequently, the non-repayment of these financial loans has caused disruption in the

management of the financial institutions, and has led to the financial crisis.

Unfortunately, the economic crisis of mid-2007 has touched the European Union, and

was firstly felt by the French financial institution, BNP Paribas. As stated by both Dermot

Hodson and Uwe Puetter, the authors of the article “The European Union and the Economic

Crisis,” what became the first sign of a long path of troubles for the EU “was a press release

from […] BNP Paribas declaring that it suspended trading on three investment funds” as a result

of the issues encountered in the US subprime mortgage market.1 However, the French financial

institution was not the only one that has suffered from it, as few weeks later; several European

banks such as the Sachsen Landesbank or the Northern Rock were hardly hit as well.

In 2008, the US Federal Reserve, the central banking of the United States, decided to

save some of these American banks in trouble before they officially become bankrupt. For

instance, as it is described in the article by Dermot Hodson and Uwe Puetter, the Federal Reserve

helped the sale of Bear Sterns to another US investment bank, JPMorgan Chase. However, the 1 Hodson, Dermot, and Puetter, Uwe. “Chapter 27: The European Union and the Economic Crisis.” European Union Politics. Oxford: Oxford University Press, 2013. 367-378. Print.

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painful financial crisis suddenly became a banking one, especially when the fourth largest

American investment bank, Lehman Brothers, collapsed in September 2008. Unfortunately, the

US Federal Reserve did not find any solution to prevent this bank to fall into bankruptcy. As a

consequence, the crisis spread in many different countries of the world, particularly in Europe,

where several financial institutions experienced very serious difficulties. Those banks that

encountered financial issues were the ones that invested heavily in the American mortgage

market.

In the European Union, many member states such as Ireland, Germany, or France decided

to avoid and help their national banks from following the path of Lehman Brothers. However, it

came out to be costly to bail out these financial institutions. In fact, the government of the

Republic of Ireland almost became bankrupt after the European Council accepted to send around

€2 trillion into the European banks. As the economic crisis started to strike the EU nation-states’

economy, EU leaders all accepted in December 2008 on a fiscal stimulus package. The plan was

that the countries commit “themselves to tax cuts and expenditure increases valued at 1.5 per

cent of GDP.”2 However, many European Union nations, such as Spain, Ireland, Portugal, and

more particularly Greece, started the economic crisis with levels of government debts that were

high. It was especially true for the Hellenic Republic as its government debt reached more than

100%, and its budget deficit came to be 12.5% of GDP. Consequently, these countries were

experiencing a sovereign debt crisis and had to be rescued as soon as possible. On May 2010, the

heads of state or government agreed to help out Greece by giving a €100 billion financial support

package. Financial supports were also given to the other eurozone nations in a state of

emergency. In order to receive the financial aid, the concerned countries were forced to accept

2 Hodson, Dermot, and Puetter, Uwe. “Chapter 27: The European Union and the Economic Crisis.” European Union Politics. Oxford: Oxford University Press, 2013, p.370

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letting its public finances under the control of both the European Union and the International

Monetary Fund. Yet, these policies were not appreciated in these mentioned nations, as

demonstrations and violence occurred. In Greece, the protests led to the resignation of Prime

Minister, George Papandreou, and made it be temporarily appointed by a former Vice President

of the European Central Bank. Another Mediterranean country, Italy, was also given a temporary

leader controlled by a former European Commissioner in November 2011.

Once Greece attained its sovereign debt crisis, the financial market got worried about the

sustainability of other members using the euro as their national currency. Influenced by German

propositions, EU leaders accepted to reform the European economic governance. In other to

prevent further problems and give financial aid to euro states, euro leaders commonly agreed to

create the European Financial Stabilization Mechanism and the European Financial Stability

Facility by May 2010. The first countries to receive financial aid from these new funding

programs were Ireland and Portugal. On December 2010, an agreement was founded to reform

the EFSM, and to create the European Stabilization Mechanism; it was also a financial aid

program, but that could lend up to €500 billion to eurozone member states. In addition, the

financial crisis brought into existence a new treaty called the Fiscal Compact, which aimed to

give closer economic policies and “a binding commitment to fiscal discipline in national law.”3 It

was signed by all the member states of the European Union in March 2012, except by the United

Kingdom and the Czech Republic.

According to both Hodson and Puetter, the economic crisis in the European Union was

the perfect opportunity to open the road for more centralization in policy-making powers at the

supranational level. However, I argue that the decisions against the financial crisis were mainly 3 Hodson, Dermot, and Puetter, Uwe. “Chapter 27: The European Union and the Economic Crisis.” European Union Politics. Oxford: Oxford University Press, 2013, p.369

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driven by the heads of state or government. Prior to the economic crisis, the Eurogroup was a

meeting of the finance ministers of the eurozone member states, which was created by the

European Council in 1997. In these meetings, the ministers were discussing economic issues, and

making decisions under the Economic and Monetary Union of the European Union. During the

period of the economic crisis, the Eurogroup has been extremely busy. For instance, one of its

many tasks was to make sure that the countries in difficulty comply with the economic policy

programs for the EU-IMF financial support packages. On October 2008, the decision made by

the heads of state or government to have a summit to discuss the banking crisis, indicated the

presidentialization of euro area governance. It was the first time in history that the eurozone

countries had met at the heads of state or government level.

In relation to euro area governance, the European Commission was mainly responsible to

look after the eurozone states, and to “yell” on those who did not follow their commitment to

coordinate the economic policies. On November 2011, legislative reforms to euro area

governance called the ‘six-pack’ were introduced to bring greater economic surveillance among

the nations. The six legislative proposals aimed to strengthen the economic governance in the

EU, and to reduce public deficits. Even though the Commission was given new responsibilities

under the reforms made by the heads of state or government, it did not see an increase of its

powers for the reason that many states were reluctant to give away their sovereignty in that

matter.

It only began as a local American problem in the US subprime mortgage market in mid-

2007; it later became a worldwide economic issue. Indeed, it led many countries in the European

Union and the eurozone to be stroked by a sovereign debt crisis. I argue that the EU’s response

to fight the crisis was done well as EU leaders were able to save national banks, and to provide

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financial supports to those countries deeply in need. I emphasize that if the European Union did

not take the good strategies to save Ireland, Portugal, Spain, and Greece, the result would have

been the same as when the US did not find any solutions for Lehman Brothers in 2008. It would

have been a complete nightmare for the eurozone nations. I think that it was a huge mistake to

accept Greece into the eurozone because it cheated to access it; consequently, its economy was

not ready to integrate the eurozone, and thus follow its powerful members such as France and

Germany. In my opinion, the fact that European leaders saved the single currency was another

successful factor for the reason that the euro broadly kept its international value. The decision-

making still remained largely intergovernmental, even though there were significant reforms and

new rules that came into existence. Indeed, the crisis brought a reform of the Lisbon treaty; it

created the ESM, and the fiscal compact. It also provided an amendment of the Stability and

Growth Pact. The European leaders successfully built a closer economic union, and ensured that

public finances are sustainable. Furthermore, the European Union created striker and stronger

rules to make sure that countries do not spend more than they have. I have always described the

European Union as being a big family, which has the duty to help out its members whenever one

encounters difficulties. The economic crisis showed once again how the European Union

member states are mainly working on a collective action process.

Bibliography

Hodson, Dermot, and Puetter, Uwe. “Chapter 27: The European Union and the Economic

Crisis.” European Union Politics. Oxford: Oxford University Press, 2013. 367-378. Print.

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“Economic Crisis in Europe: Causes, Consequences and Responses.” Europa.eu, 2009. Web. 6

Apr. 2015.

Kenny, Thomas. “What is the European Debt Crisis?” About Money. Web. 6 Apr. 2015.

Business, Bloomerg. “The European Debt Crisis Visualized” Online Video. Youtube.

Youtube. Web. 6 Apr. 2015.

Giannoulis, Karafillis. “The reasons behind the Eurozone financial crisis” NewEurope, 17

Apr. 2013. Web. 6 Apr.2015.

Paulo, Sebastian. “Europe and the Global Financial Crisis.” The Fondation Robert

Schuman, Apr. 2011. Web. 6 Apr. 2015.