Revisiting the debt crisis in Europe

SOON after the financial crisis of 2008 in the US where several large institutions had to be bailed out, Europe was struck with a debt crisis where countries had to be rescued. The sovereign debt crisis in Europe was not easy to navigate and on several occasions it threatened the very existence of the single currency union, pushing the entire global financial system to the brink. Although the problem has not been fully resolved, for now another financial crisis has been avoided. But that's not enough. The European Court of Auditors, in a report released recently, raised several questions on the way the European Commission handled the crisis. Assistance to troubled countries was managed by the European Commission, International Monetary Fund and the European Central Bank. In their report, the auditors have noted that the commission was unprepared for the crisis. It not only underestimated the fiscal imbalance but also did not properly evaluate the consequences of large foreign debt inflows in the run-up to the crisis. The report also highlights that countries seeking assistance were not treated in the same way and conditions were managed differently.

"The risk of treating different countries inconsistently or demanding unnecessary reforms remains a challenge to the process of programme management," said the report. It has also made several recommendations, including rapid mobilization of human resources, both from inside and outside the commission, if the need arises. To be sure, the outcome of the adoption of the euro as a single currency has turned out to be awfully different from the idea. The European Union adopted the single currency for deeper economic integration and progress. But the acceptance of the euro reduced borrowing costs even for relatively weaker economies, which resulted in debt-fuelled growth for several years and elevated the level of imbalances. As the credit conditions tightened in the aftermath of the 2008 financial crisis, high deficit and debt began to unravel in a number of peripheral economies. Yields on sovereign debt started rising in countries such as Ireland, Greece and Spain. The fear was that even if one country defaults on its debt, the contagion will rapidly spread and loss of faith in the marketplace would break the euro. But despite the impending risk, bailouts were not easy to come by, especially in the case of Greece, where decisions have been taken at the very last minute. The conditions imposed for seeking assistance have also come under criticism. Economist Joseph Stiglitz, for instance, in a column last year said: "What is needed is not structural reform within Greece and Spain so much as structural reform of the euro zone's design and a fundamental rethinking of the policy frameworks that have resulted in the monetary union's spectacularly bad performance." The auditors have not reviewed the Greek bailout and will issue a separate report on it at a later date.