The Global Recession and the Viability of the Eurozone

While chaos and change roiled the Muslim world, economic crisis sapped growth and political unity in Europe and North America. In 2008 the United States entered a deep recession, caused by the burst of the housing boom, bank failures, and an overheated financial securities market. The U.S. government spent massive sums to recharge the economy. Banks, insurance agencies, auto companies, and financial services conglomerates received billions of dollars in federal aid. By 2016 the economy had improved and much of the housing market had recovered, though some critics claimed that income inequality was higher than ever.

The 2008 recession swept across Europe, where a housing bubble, high national deficits, and a weak bond market made the crisis particularly acute. One of the first countries affected, and one of the hardest hit, was Iceland, where the currency and banking system collapsed outright. Other countries followed — Ireland and Latvia made deep and painful cuts in government spending to balance national budgets. By 2010 Britain was deeply in debt, and Spain, Portugal, and especially Greece were close to bankruptcy.

This sudden “euro crisis” put the very existence of the Eurozone in question. The common currency grouped together countries with vastly divergent economies. Germany and France, the zone’s two strongest economies, felt pressure to provide financial support to ensure the stability of far weaker countries, including Greece and Portugal. They did so with strings attached: recipients of EU support were required to reduce deficits through austerity measures. Even so, the transfer of monies within the Eurozone angered the citizens of wealthier countries, who felt they were being asked to subsidize countries in financial difficulties of their own making. Such feelings were particularly powerful in Germany, forcing Chancellor Angela Merkel (r. 2005– ), the nation’s first woman chancellor, to move cautiously in providing financial stimulus to troubled Eurozone economies.

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The difficulty dealing with the stubborn Greek debt crisis prompted debates about the viability of a single currency for nations with vastly different economies as well as widespread speculation that the Eurozone might fall apart. In 2010 and 2012 Greece received substantial bailouts from the IMF, the European Common Bank, and the European Union (the so-called Troika). In return for loans and some debt relief, Greek leaders were required to implement a painful austerity plan — which meant raising taxes, privatizing state-owned businesses, reforming labor markets, and drastically reducing government spending on employee wages, pensions, and other popular social benefits. Greek unemployment hit a record 25 percent in 2012, and more than half of young adults lacked jobs. Rampant joblessness meant declining tax revenues and the Greek economy continued to weaken. As the government cut popular social programs, demonstrators took to the streets to protest declining living standards and the lack of work; in Athens, protests large and small were almost a daily occurrence.

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Anti-Austerity Protests in Greece With protest marches and a rally in front of the Greek parliament, thousands of anti-austerity voters celebrated the results of the July 2015 Greek referendum in the streets of Athens. The popular vote soundly rejected a bailout deal proposed by the IMF, the European Common Bank, and the European Union, which would have required the Greek government to implement harsh austerity measures. Just days after the vote, Greek leaders backed down and accepted the plan anyway.
(© Bjorn Kietzmann/Demotix/Corbis)

The 2015 Greek elections brought the left-wing Syriza Party and the charismatic prime minister Alexis Tsipras to power. In the Thessaloniki Programme, Tsipras and his party promised voters a tough stand against the Troika’s fiscal demands and an end to austerity. (See “Evaluating the Evidence 30.3: The Thessaloniki Programme.”) Yet Troika negotiators, led by Germany, maintained an uncompromising line: if Tsipras and Syriza failed to meet Greek debt payments, they would be forced into a “Grexit” (a Greek exit from the Eurozone). After a dramatic series of events, which included a resounding “no” vote in a Greek referendum on the deal proposed by the Troika, Tsipras backtracked and accepted further austerity measures in return for yet another bailout loan. Among other conditions, Greek leaders promised to sell off about 50 billion euros’ worth of government-owned property, including airports, power plants and energy assets, roads and railroads, and the national post office.

Even as the Greek crisis shook European unity, in June 2016 Great Britain voted to leave the EU all together. The campaign for the “Brexit” (British exit from the EU) was intense. The narrow victory of those wanting “out” showed that many Brits did not want “Eurocrats” in Brussels intruding on national policy and did not appreciate the EU’s relatively open immigration policies. Prime Minister David Cameron (r. 2010–2016) resigned immediately. Though Britain had two years to negotiate the terms of the exit, global financial markets fell, far-right populist parties on the continent rejoiced, and EU supporters expressed deep concern about the future of the union.