On the other hand, Germany has improved its competitiveness by seven to eight percent. The result has been that countries such as the Netherlands and Germany went with surpluses in the foreign economy, while several southern European countries went with some large deficits.
International financial players (banks, companies, insurance companies, funds, etc.) seemed to take this development lightly for a long time. They made little difference to the euro member. Countries that previously had to pay a high interest rate to borrow capital could, after the establishment of the euro, finance large budget deficits with cheap loans . A large German savings surplus also led to German banks happily channeling surplus capital to the southern euro countries. In retrospect, it seems clear that the generous supply of cheap credit contributed to excessive growth in public expenditure (Greece and Portugal), and / or in house prices (Spain and Ireland).
3: Then came the financial crisis
The financial crisis, which hit hard in the autumn of 2008, cost European treasuries dearly, both as lost tax revenue, as rescue operations for the banks and as public employment measures . Budget deficits and public debt therefore increased sharply in a short time. According to the OECD , the total annual budget deficit in the eurozone was 0.6 per cent of value creation (GDP) in 2007. In 2010, it rose to 6.3 per cent. Total government gross debt increased from 66 per cent of value creation in 2007, to 84 per cent in 2010.
Only in late autumn 2009 did the financial markets seriously focus on government finances. The Greek government was then exposed for underreporting the growth in spending for several years . Since then, the crisis, which thus started in little Greece, has gone from strength to strength. Financial investors no longer saw the member countries as equally secure borrowers, and Greece (especially), Portugal and Ireland were suddenly faced with far higher borrowing costs than safe Germany (see figure). The term PIIGS countries has often been used in the most indebted member countries of the eurozone: Portugal, Ireland, Italy, Greece (G for Greece) and Spain.
As the first country out, Greece had to receive financial crisis aid from the EU and the International Monetary Fund (IMF) in the spring of 2010. By then, the interest rates the state had to pay had risen to an unmanageably high level. According to EHEALTHFACTS, the crisis loan has subsequently been extended in several rounds, since Greece is still almost excluded from international loan markets.
As is well known, the problem did not stop in Greece, despite the fact that the EU and the IMF together established a large crisis fund to prevent “transmission” to other euro countries. It did not take long before Ireland (November 2010) and Portugal (May 2011) also had to request financial assistance. These three countries are relatively small economies. Together, they make up six per cent of the total value creation in the eurozone. The crisis was therefore first perceived as a challenge that the politicians together could handle, if they wanted to. Only the most pessimistic voices believed the crisis posed a danger to the very existence of monetary union.
In the summer of 2011, the crisis took a new, more dangerous turn . Suddenly, one of the really big economies had come into the spotlight of financial investors, namely Italy. The country constitutes the world’s seventh largest economy – 17-18 per cent of value creation (GDP) in the eurozone. A possible financial crisis in such a large economy means a threat to the entire monetary union. The country has high public debt, with a gross debt of 120 percent of value creation. The other euro countries will thus have a problem helping Italy if they should have a payment problem. The country is therefore referred to as “Too big to fail, too big to save”.
4: A crisis of confidence
Why do investors apparently suddenly lose confidence in the ability to pay of some countries, as they did in part with Italy in the summer of 2011? Unlike other countries in the market spotlight, such as Spain and Ireland, Italy never experienced a housing or credit bubble. The country also did not pursue a particularly irresponsible fiscal policy in the years before the crisis.
Over the last 20 years, the Italian government has almost exclusively had a budget surplus, before net interest expenses. Debt was gradually reduced, from a high level. However, as in many other countries, debt rose significantly in connection with the downturn from 2008. As long as the public sector runs a surplus, Italy will still not have major problems with foreign debt, even though it is large. An important restraint: This only applies as long as interest rates remain low.
