The Financial Crisis in the European Union

The Financial Crisis

Pre-crisis

• Stability and Growth Pact

- Members agreed they would keep their GDP at certain limits.

- Excess of deficit procedure where sanctions would be imposed if members broke the rules.

- However it wasn’t imposed very strongly enforced

Commission v Council (Excess Deficit Procedure)

• 2003 France and Germany didn’t want to obey budgetary rules and the Commission tried to enforce the rules but were unsuccessful as the Court held that because France and Germany got a blocking majority they didn’t have to obey the measures.

- Highlighted the lack of power the Stability and Growth Pact had.

- MS only had to follow broad guidelines on economic policy.

- Because they were not legally binding they were ineffective.

Crisis

• In 2008 markets had doubts about countries' ability repay debts.

• As a result it was difficult for countries to borrow which lead to Greece faking their economic figures.

• Greece had an unsustainable deficit.

• Ireland's banks lent irresponsibly.

• The Banking Crisis in became a sovereign debt crisis (when countries continually borrow and refinance debt but in doing so create more debt).

• Countries borrowed by issuing bonds but the interest payments were too high.

• Debt and budget deficits were increasing.

• Caused market fears to spread to Spain and Italy.

• IMF began issuing loans.

• Ireland, Greece and Portugal received bailouts as long as they stuck to strict budgetary conditions.

• They had to implement cutbacks.

• Countries in a stable situation were worried about bailing out countries because they were worried that they wouldn’t alter their behaviour.

• Because the entire EU were using the Euro, countries in trouble couldn’t print money to stimulate their economies.

• All this created an element of imbalance in the economic and monetary union.

• Citizens weren't happy about sending tax money to other states.

• Conflict arose between countries.

• Ireland's troubles could've been avoided with proper regulation of the banks.

• Reforms needed to take place as a result.

ECB (Stabilisation)

• ECB powers were extended and they could now be a lender of last resort as they were given power to buy bonds.

• Previously the ECB only controlled the issuing of the Euro and short term interest rates.

• ECB and central banks of Eurozone states created the Eurosystem.

• They were given control of conducting the Union's monetary policy.

• They set interest rates.

• Lent to financial institutions.

• President of Council of Ministers and Commission now attend ECB meetings and the ECB are also invited to Euro group meetings and Council meetings to discuss the competency of European System of Central Banks.

• Greater level of monitoring of fiscal policy by ECB.