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Holding the Euro together

Thursday 10 June 2010 - by Tim Gieles and Helena Walsh

As sovereign debt in the European Union threatens to destabilise the euro. Tim Gieles and Helena Walsh look at how the eurozone got here and examine the potential solutions on offer

“The Euro is in danger”, said German Chancellor Angela Merkel on 19 May in the German Bundestag (German lower House of Parliament).

But is the euro in real danger, or was the European rescue package adequate and has the euro been saved?

When the Greek government revealed that it might not be able to repay its loans, this caused a crisis of confidence about the government debts of the peripheral members of the eurozone such as Spain, Portugal, Italy, and even Ireland, the so-called PIIGS countries. Government leaders acted swiftly for European standards.

In exchange for austerity measures worth 13 per cent of Greek GDP, the eurozone committed €80bn ($98bn) supplemented by €30bn ($37bn) from the International Monetary Fund over a three year period. The €110bn ($135bn) functions as a loan facility so that Greece can avoid expensive commercial borrowing.

Initially the markets rallied behind the loan package. But this did not last long, as new rumours about the state of the public finance of other PIIGS countries surfaced. Markets remained highly volatile, fuelled by credit rating agencies decreasing country ratings, and euro and global stocks once again fell heavily, prompting fears of another post-Lehman crash.


For a second time governments had to act fast, as now their primary task was to prevent contamination to other weak eurozone members. This time it required a weekend-long emergency meeting in early May before the Union’s finance ministers found a solution acceptable to all member states. The ministers negotiated a €750bn ($918bn) shock-and-awe rescue package to demonstrate to the world that the eurozone would not give in and let its member states default on their ability to repay loans.

The rescue package consists of three parts. Firstly, the European Commission can rapidly borrow €60bn ($74bn) on the international markets using the credit of the triple A-rated EU budget as collateral.

This implies however that non-eurozone members are caught too in case a country cannot repay its loan. Secondly, the plan provides for an additional €50bn ($61bn) based on bilateral agreements between eurozone members, and supplemented by the IMF for €250bn ($306bn). The last element of the plan is perhaps most controversial: the European Central Bank, going beyond its mandate and its political independence, will buy up government bonds from eurozone members. The peripheral member states of the eurozone on the other hand pledged to rigorously restructure their public finances.


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