The financial market crisis touched off by the US real-estate market in 2007 that has pushed the entire world economy into recession has been a massive burden to the public budgets in nearly all countries of the world. In addition to tax revenue shortfalls and higher costs for social benefits, governments have been massively burdened by bank rescue measures and economic stimulus packages.
As a consequence, imbalances and structural deficits emerged in the eurozone that had been accumulating since the introduction of the common currency but whose ominous dimensions only became evident because of the crisis. At the beginning of 2010 Greece (Greek Budget Crisis ) was the first to move to the brink of insolvency. It light of its high budget deficit and weak economic performance, capital markets refused to issue new credit and to refinance maturing liabilities. To prevent insolvency, at the beginning of May 2010 the other euro countries supported Greece with a rescue package amounting to 120 billion euros.
After other countries like Spain, Portugal and Ireland also had to pay high interest rates to finance their national debt, the so-called euro rescue package amounting to 750 billion euros followed only a week later. The controversial package was decided on by the euro countries over the weekend of 8/9 May 2010, and the law needed to implement the measures in Germany was passed within two weeks.
The euro rescue plan suspended fundamental principles of the Maastricht Treaty, especially the no-bail-out clause – a ban on mutual credit assistance. These changes had serious economic consequences. The interest rates on government bonds of the various countries that were drifting apart as a result of the new risk assessments were to be artificially kept together. This led to a weakening of the control function of the capital market, which induces cautious behaviour on the part of borrowers and creditors. For Germany the package bears considerable budgetary risks. Moreover, it retards economic growth since the guarantees for the euro partners divert additional capital to the indebted countries which is thus no longer available for investments in Germany.
As a result of the crisis the question of structural reform for the currency union has come to the forefront.
"Ist der Euro noch zu retten?" Presentation by Hans-Werner Sinn (Große Aula, Ludwig Maximilians University, 19.12.2011) (Video), in German.
"Europa in der Krise" Presentation by Hans-Werner Sinn (Munich Seminar, 14.12.2010) (Video), in German.
Fakten zu Griechenland und anderen Schuldnerstaaten der EU, compilation, Ifo Institute, 17 March 2010, updated on 7 May 2010. Download, PDF, 214 KB
"Facts and Background on the Greek Budget Crisis" Ifo press release of 16.03.2010 (Text)
Ifo Viewpoint No. 130: Buying Out the Store with the Printing Press (10 November 2011)
Ifo Viewpoint No. 129: The Threat to Use the Printing Press (31 October 2011)
Ifo Viewpoint No. 128: The Way Out of the Crisis (23 September 2011)
Ifo Viewpoint No. 127: The Trouble with Eurobonds (22 September 2011)
Ifo Viewpoint No. 126: The European Balance of Payments Crisis (29 July 2011)
Ifo Viewpoint No. 125: Greek Tragedy (27 July 2011)
Ifo Viewpoint No. 124: The ECB Must Change its Policy (8 July 2011)
Ifo Viewpoint No. 121: Why the Rescue Fund is Large Enough (16 February 2011)
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