Skip to main content Accessibility help
×
Hostname: page-component-848d4c4894-xfwgj Total loading time: 0 Render date: 2024-06-17T01:47:58.139Z Has data issue: false hasContentIssue false

2 - Eurozone

Published online by Cambridge University Press:  14 April 2023

Simon Wren-Lewis
Affiliation:
University of Oxford
Get access

Summary

Introduction

The popular understanding of the Eurozone crisis is that various periphery Eurozone governments overspent and as a result found it difficult to sell their debt on the markets. During the crisis the media would ask whether measures being taken to reduce budget deficits were enough to convince the markets. This completely failed to see why the crisis happened in the Eurozone and not elsewhere.

To understand the Eurozone crisis you need to know how it ended. In September 2012 the European Central Bank (ECB) introduced OMT (outright monetary transactions). OMT was in essence an unlimited commitment to buy the debt of particular countries: to be what economists call a lender of last resort. What created the Eurozone crisis between 2010 and 2012 was the ECB’s refusal to act as a lender of last resort to individual Eurozone governments.

Governments with their own central bank cannot be forced to default by the markets, because the central bank will step in and buy any unsold debt. As I described in the first post of Chapter 1, in the UK the Bank of England did this as part of its unconventional monetary policy. For institutions and individuals lending to these governments, having the central bank as the lender of last resort removes the risk of a forced default. Even if the rest of the market fails to buy the debt, the government will not be pushed into default.

In contrast, as long as the ECB refused to act as a lender of last resort to Eurozone governments, Eurozone government debt was much riskier and much more susceptible to market panic. So the crisis started by Greece (which really did borrow too much) was allowed to spread to other countries where public finances were sound. Once OMT was put in place the crisis quickly subsided, and did not start up even when Greek default again became possible in 2015. As Post 2.1 shows, these points were understood well before OMT was introduced.

The consequences of the delay in introducing OMT were immense. Austerity occurred in all Eurozone countries, not just the periphery, with large costs in terms of a second recession and lost resources, as outlined in Post 2.6.

Type
Chapter
Information
The Lies We Were Told
Politics, Economics, Austerity and Brexit
, pp. 54 - 89
Publisher: Bristol University Press
Print publication year: 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

  • Eurozone
  • Simon Wren-Lewis, University of Oxford
  • Book: The Lies We Were Told
  • Online publication: 14 April 2023
  • Chapter DOI: https://doi.org/10.46692/9781529205534.004
Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

  • Eurozone
  • Simon Wren-Lewis, University of Oxford
  • Book: The Lies We Were Told
  • Online publication: 14 April 2023
  • Chapter DOI: https://doi.org/10.46692/9781529205534.004
Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

  • Eurozone
  • Simon Wren-Lewis, University of Oxford
  • Book: The Lies We Were Told
  • Online publication: 14 April 2023
  • Chapter DOI: https://doi.org/10.46692/9781529205534.004
Available formats
×