Eurozone Crisis: Causes and Consequences
                     E U R O Z O N E  C R I S I S :  
C A U S E S  A N D  
C O N S E Q U E N C E S
Introduction
 The Eurozone cr is is  which broke out  in May 
2010 is  a long way from fi nished.  Char les 
Wyplosz puts i t  b lunt ly  in  his  chapter  –  “Five 
years later ,  growth is  miserable and is  
forecasted to remain miserable as far as  the 
forecasters’  can see.
Source: cepr.org
The Crisis
 Governance is  in disarray as the tragic  
Summit of  Ju ly 13 –  the last  of  an incredible  
ser ies of  offi cial  meet ings –  showed”.  Worse 
yet ,  there is  widespread bel ie f  that the 
fragi l i t ies and imbalances that  pr imed the 
monetary union for  th is  cr is is  are st i l l  
present .
Source: cepr.org
A Consensus View of 
the Causes
 In the wor ld of  pol icymaking,  narrat ives are 
incredib ly  important  s ince i f  we cannot  agree 
on what  happened –  or  more precise ly ,  on 
what  were the most important  th ings that  
happened –  then we cannot agree on how to 
remedy the  s i tuat ion.
Source: cepr.org
A Consensus View of 
the Causes Cont.
 The second is  to ident i fy a consensus v iew of  
the causes of  the Eurozone cr is is .
 Again,  we cannot know what needs fi xing 
unt i l  we agree broadly on what  was broken.
Source: cepr.org
Core Reality
 The core  real i ty behind v i r tual  every cr is is  i s  
the rapid unwinding of  economic imbalances.  
 The s ize and durat ion of  the cr is is  typical ly  
depends upon the s ize of  the  in i t ia l  
imbalances,  how the in i t ia l  shock gets 
magnifi ed by a var iety of  ‘ampl ifi ers ’ ,  and 
how rapidly  and eff ect ive ly  pol icy responds.
Source: cepr.org
Economic Crises
 In the case of  the Eurozone cr is is ,  the 
imbalances were extremely unor iginal .  
 They were  the  standard culpr i ts  that  have 
been responsible  for  economic cr ises s ince 
t ime immemoria l  –  namely,  too much publ ic  
and pr ivate debt  borrowed from abroad.  
Source: cepr.org
Capital flows
 From the euro’s  launch and up unti l  the cr is is ,  
there were big capita l  fl ows from Eurozone 
core nat ions l ike Germany,  France,  and the 
Nether land to Eurozone per iphery nat ions l ike 
Ire land,  Portugal ,  Spain and Greece.  
Source: cepr.org
Housing and 
government 
services/consumption
 A major  s l ice  of  these were invested in  non-
traded sectors –  housing and government 
services/consumption.  This  meant assets 
were not  being created to help pay off  in  the 
investment.
Source: cepr.org
Global Crisis
 When the Eurozone cr is is  began –  t r iggered 
ul t imately  by the Global  Cr is is  –  cross-border 
capita l  infl ows stopped.  This  ‘sudden stop’  in 
investment fi nancing ra ised concerns about  
the v iabi l i ty of  banks and,  in  the case of  
Greece,  even governments themselves.
Source: cepr.org
Loss of Eurozone 
investors’ trust
 The rapid loss of  Eurozone investors’  t rust  in  
the defi cit  nat ions– was ampl ifi ed in severa l  
ways.  Given the Eurozone design,  
governments who got  in  trouble had no lender 
of  last  resort .  
Source: cepr.org