Europe in turmoil: five years of economic crisis


The eurozone crisis didn’t emerge from a clear blue sky five years ago. Greece’s economic problems were well known; in 2004, it admitted fudging its deficit figures to qualify for euro membership, and a year later Athens brought in an austerity budget to, it hoped, bring down borrowing.

But the left-wing Pasok government still shocked the financial markets and its EU neighbours on 18 October. Fresh from winning a general election, it announced that Greece’s budget problems were far worse than imagined; a deficit equal to 12% of national output, not the 6% forecast by the previous government.

That admission triggered market panic, tumbling share prices, credit rating downgrades – setting the tone for the years ahead.

It was a wild autumn, five years ago – with the ripples of financial panic reaching as far as Dubai:

Dubai shares plummet as crisis continues – live

But Europe was the crucible of our story. By spring 2010, the eurozone was entering full-blown crisis mode, and the Guardian was starting to live-blog every twist and turn of it.

In February, the situation turned violent as riot police fired on protesters in Athens during a one-day strike.

Greeks protest as government slashes public spending

Christos Katsiotis, a representative of a communist-party affiliated union, drew the battle lines against austerity, saying:

“It’s a war against workers and we will answer with war, with constant struggles until this policy is overturned,”

And struggle they did. But overturn the policy, they did not.

A €45bn Greek rescue plan was cobbled together by the IMF and the EU, before Standard & Poor’s dramatically upped the ante on 27 April 2010 by slashing Greece’s credit rating to Junk.

The following day, politicians and eurocrats began scrambling to hammer out a larger rescue package for Greece:

That was the time when puns about Acropolis Now, and ‘making a drachma out of a crisis’ were in vogue:

But there wasn’t much time for jokes. By May 2010 the markets were reeling, just as Britain went to the polls in a nail-biter of a general election.

With investors flapping, Europe acted, agreeing a €110bn bailout for Greece, and then a €750bn funding plan to hold the eurozone together.

The markets rallied! Then tumbled the very next day! Investors recognised the true horror of Europe’s toxic bank debts, and the restrictions imposed by the single currency.

The crisis rumbled on, relentlessly; November 2010 saw Ireland follow Greece into bailout misery.

Dublin signed up for years of austerity in return for €90bn of loans, largely to cover the cost of nationalising its broken banking sector.

Debt crisis sends financial markets into turmoil – Monday 8 August 2011

Cue a dramatic autumn. Greece now needed a second bailout, with its economy in recession and its government on the ropes. And this time, Europe was going to insist that private investors shared the pain.

But arguments over the haircut that bondholders should take rumbled on for weeks. And overshadowing it all, Italy and Greece’s government were both wobbling.

26 October 2011 was eurozone crisis D-Day, as leaders met for another of those crucial summits. And the mood was electric, with Italian MPs trading blows in Rome and Angela Merkel calling it the biggest crisis in decades.

In a major boost for German leader Angela Merkel, the German parliament has voted overwhelmingly to expand the European Financial Stability Fund (EFSF), the eurozone’s rescue fund.Addressing the Bundestag before the vote, Merkel said Europe was facing its toughest challenge since the end of the Second World War. “If the euro fails, Europe fails,” Merkel said.

After fisticuffs in parliament the Italians have agreed on a package of the economic reforms demanded by EU leaders. Silvio Berlusconi is arriving in Brussels with a 15-page ‘letter of intent’ setting out Italy’s commitments.

And overnight, Sarkozy, Merkel, et al hammered out a deal:

Here’s a summary of what was agreed:

The firepower of the EFSF bailout fund will be increased to $1.4tn (€1tn)

Banks agree 50% writedown in the face value of Greek government bonds

Athens will be handed a new €100bn bailout early in the new year

European leaders had an eye on the rest of the world:

8.41am: Apparently, Sarkozy rushed out of the leaders’ meeting in the wee hours of this morning to be the first to give a press conference.

Announcing the enlargement of the bailout fund to $1.4tn, he stressed: “$1.4tn – yes I said dollars. I’m not giving this information for European markets but for global markets.”

And traders, drunk on ‘hopeium’, drove the FTSE 100 up to a three-month high.

But then came the hangover. November 2011 is a month seared into the memory of eurozone crisis combatants. Two governments fell. Two elected leaders were replaced by technocrats.

Greece’s prime minister, George Papandreou, was the author of his own downfall. Having agreed a second bailout deal, laced with fresh austerity, G-Pap decided that it was only fair to give Greeks the chance to accept, or reject it.

This passion for democracy went down badly with fellow EU leaders, gathered in Cannes for the G20. And that’s when the drama really started.

Finance minister Evangelos Venizeloz, sensationally, flew back to Greece and announced that the referendum was a dreadful idea and should be scrapped.

While the Greek government wobbled, the ECB — under the new leadership of Mario Draghi — slashed interest rates. And late that night, Papandreou’s precious referendum was off.

On the night of 3 November, we wrote:

George Papandreou has abandoned his plan to hold a referendum, amid scenes of open warfare in his own party. Finance minister Evangelos Venizelos forced the move in an early-morning speech, saying Greece’s eurozone membership was too important to risk.

Opposition leaders are resisting Papandreou’s efforts to create a caretaker government of national unity. They are calling for his resignation instead.
Vote of confidence will still take place on Friday night. Papandreou may quit even if he wins
The European Central Bank surprised the markets – by cutting interest rates to 1.25%.

The next day was also stuffed with activity. In Cannes, European countries came under real pressure from America to step up to the plate and shore up the eurozone. The summit (Silvio Berlusconi’s last waltz on the world stage as a political leaders) achieved little, though, and merely welcomed measures agreed last month.

Political correspondent Andy Sparrow remarked:

This is meant to be the “firewall” leaders have been talking about. At the moment it is looking more like a hay one than a concrete one.”

In Greece, crowds flocked to Syntagma Square for their prime minister’s swansong.

Papandreou faced down his critics in parliament, won his confidence vote around midnight.

He promptly quit the next day, triggering one of the most tense weeks in the eurozone’s history.

While Greece struggled to find a new leader, the spotlight turn dramatically to Italy. There, the national debt had climbed towards 1.9 trillion euros while Silvio Berlusconi bunga-bunga’d around.

But there was no time for partying as Italy’s borrowing costs rocketed. Suddenly, 7% was on everyone’s lips – the danger zone for Italian borrowing costs.

Eurozone debt crisis: Berlusconi to resign after austerity budget passed – Tuesday 8 November 2011

But it took until Friday for Greece to be bustled into accepting a technocratic government, led by Lucas Papademos, a former senior official at the ECB.

And in Italy, senators finally agreed an austerity package, paving the way for former European commissioner Mario Monti to become PM.

But even then, there was more tension as Monti struggled to form a government; bond yields tore through that 7% mark on the “most worrying day” in the crisis so far.

The installation of Monti as PM did, for a while, calm the eurozone, as did the news that the ECB was aggressively buying up Spanish and Italian bonds to push down yields.

And there was time for further drama; another EU summit to ‘save the euro’, but this time David Cameron vetoed plans to rewrite the Lisbon Treaty.

2011 ended with the UK looking more isolated in Europe than for years…

European leaders end Brussels summit with treaty deal

And we headed off for Christmas, with Bank of England governor Mervyn King warning that “the warning lights are flashing red” across the Eurozone.

Onto 2012. And the year began with record unemployment, weak growth, and the night of the credit rating downgrades.

S&P wasn’t hanging about, downgrading nine countries and casting France’s AAA rating into the abyss.

The French and UK governments has already fallen out, in a slightly unedifying (but terribly entertaining) spat over who had the worst economy.

There were more hurdles to jump – March saw Greece hammer out the details of the debt swap with private investors, who took large haircuts to bring Greece’s huge debt mountain down.

Eurozone crisis live: Greek debt swap declared a ‘credit event’

France struck out in a major new direction on Sunday, ejecting Nicolas Sarkozy from the presidency and voting in Socialist party candidate François Hollande. He campaigned against unpopular austerity measures, on a platform of promoting growth as opposed to the mere elimination of debt.

In Greek parliamentary elections voters rejected two mainstream parties who had helped negotiate austerity plans meant to pull the country out of its debt crisis in favor of extreme candidates who echoed the popular outcry against austerity. The move cast further doubt on Greece’s long-term ability to stay in the eurozone.

The word of the day was ‘eurobonds’ — shared debt to push down borrowing costs in the periphery. No chance, said Germany, not without political union and budget restraint.

But without Germany’s help, peripheral countries were in trouble.

Eurozone crisis live: Fitch hits Spain with 3-notch downgrade – as it happened

As Greeks returned to the polling booths in June 2012, borrowing costs across the single currency were rising. Syriza held the lead, and the talk across the City was that Grexit was a certainty.

But it wasn’t. In the event, the right-wing New Democracy party came home first, hammering out a coalition with the rump of the Pasok party.

And with Spain agreeing a rescue plan for its banking sector, a measure of calm was returning…

Angus Campbell, head of market analysis at Capital Spreads, commented:

For now the two elephants in the room, namely Greece and Spain, have morphed into kittens following the Spanish bailout and newly formed Greek coalition today. Now investors are focusing on the prospect of more money being pumped into the system in a bid to prevent a slump in global growth.

But the calm didn’t last long. By July, Spain was feeling the heat, with bond yields surging over the 7% mark.

We wrote:

Rather worryingly, Spanish and Italian bond yields are back at pre-EU summit levels. The Spanish 10-year yield has broken through the 7% danger mark again, up 25 basis points at 7.038%. The Italian equivalent has risen through 6%, another important level – up 5 bps at 6.046%.

And there were even rumours, wild and incorrect, that Finland might quit the euro.


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