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Has Europe Improved After the European Debt Crisis?

The European Debt crisis shook the European economy throughout the late 2000s and early 2010s. The impact of this event cannot be understated, as several nations are still experiencing the aftermath of such an explosion in debt. Characterised by rising government debt, down-spiralling investor confidence, and the threat of large defaults, the crisis exposed the vulnerabilities of the European Union. It challenged the resilience of the world's interconnected financial systems. Understanding the causes behind this crisis is crucial to prevent such scenarios from repeating, ensuring a stable financial environment.

This essay dives deeper into the Eurozone Crisis to explore the causes, consequences, and policy implications of the crisis, as well as explores different metrics to measure its extent. It also looks at individual countries impacted by the crisis to discover their own vulnerabilities and strategies used in the battle to calm the storm. Ultimately, the question of whether there has been an overall improvement in the European financial systems will be answered.

The story of the European Union has been a turbulent one. After the end of the Second World War and the economic growth booming afterwards, a large union in Europe was only a matter of time. Beginning as a ‘community’ of countries in the 70s, countries all around Europe slowly started to gain interest. The next big step towards the union was in the 1980s. By 1981, ten countries were considered members of the European Community, a number only growing in the next years. February of 1986 saw a monumental step – the Single European Act. Now, customs regulations were set in stone for the member countries. The slow collapse of communism at the dawn of the 90s also saw a large move forward for the future union.

The 90s proved to be a pivotal decade for Europe. Free travel around member countries, a single market, institutional reforms resulting from the Amsterdam Treaty and finally the introduction of the Euro in 1999. All of the above changes will be influential in the new millennium. (3)

Although the European Financial system felt sound, some issues were still present. In its application for the union, Greece together with the Goldman Sachs bank concealed large amounts of debt. As it is now known, Greece’s financial dysfunctionality would make a hit on Europe in the crisis. (2)

When it comes to the main causes of the crisis, debt accumulation is often quoted as the biggest contributor to the event of the Eurozone Crisis. Nations running a budget deficit for consecutive years meant that the levels of government debt only kept rising. On the other side, households got access to relaxed loan conditions from banks. This meant rising borrowing from other countries, so when the 2008 financial crisis began, foreign investors largely lost confidence in the ability of borrowing countries to pay back in debt. Together with that, households became more vulnerable to shocks. For example, changing interest rates or declining incomes during the crisis meant inability to pay back, leading to defaults.

Next, trade imbalances in several European nations played a role in the troubles. Spain and Greece alike imported more goods and services than they exported – an imbalance in the current account of the balance of payments. This has several implications. To summarize, an overreliance on foreign states to provide goods and services for consumption creates disparities and tensions. Being reliant on other countries also increases exposure to shocks. If the imports were to decrease, what would happen to the consumers who do not have sufficient domestic production to fill all their wants and needs? The below chart shows Spain’s balance on the current account going into a large deficit throughout the late 2000s. (6)

The European Union had a similar trend, dipping into the negatives after the mid 2000s, though, recovering strongly in the 2010s. The above is shown by the chart below with current account balance shown as a percentage of the GDP. (7)

The structure of the Eurozone also played a part. Although the European Union is a monetary union, it is not s fiscal one. This means that although monetary systems are shared among the countries, the budgets and taxes are not. This, in turn, creates difficulties in response to any financial turmoil, as coordinating between countries with contrasting systems is incredibly challenging. Generally, countries that are better off would provide support through transfers to more struggling nations, however, due to the differences mentioned above, this procedure was made complicated.

What made the situation arguably worse was the shared Euro. Generally, normal practice would be to devalue the currency. Some countries in the European Union desired that, however, it proved impossible. For the struggling countries, the devalued currency would make exports and investments more internationally price-competitive assisting in the accumulation of funds to pay off any debt. Though, all of the above was impossible, making the situation worse for some of the member countries.

Lastly, an interesting situation occurred in the real estate market. Imagine a person mortgaging their home. Once the crisis hit, it became more difficult to pay off the debt. What also happened, was the bursting of real estate bubbles leading to a drop in house prices. Thus, if the person ended up paying off the house, they received an undervalued asset, for which full price was paid. The graph below represents the house price index in the US. Although in a different place, the United States also experienced a similar real estate bubble situation.


Next, it is important to consider the consequences of the crisis. Firstly, the economic recession. In the case of Greece, the Gross Domestic Product fell by over 20% representing an unprecedented decline. A drop in consumption and investment meant that it only got harder to pay the debts. Recessions also generally lead to increasing unemployment and dropping standards of living, due to dropping GDP per capita. (4)

Another consequence of the crisis was the implementation of Austerity measures – a policy aimed at decreasing public spending and increasing in tax, an aggressive contractionary fiscal policy. Such policies also decreased economic growth through a decrease in aggregate demand. Additionally, a decrease in living standards also occurred, as a decrease in government spending means less transfer payments to the population, less infrastructure and potentially less healthcare provisions.

The above Austerity measures were also protested, causing political instability. Public outrage incidents happened across Spain and Greece, exacerbating the issue.

Furthermore, another negative consequence was the rising inequality between the European nations. As seen in the diagram below, an already existing difference between the GDPs of Germany and Greece was only exaggerated following the crisis. Equality remained one of the founding goals of the European Union, so such results only harmed the trust in the management of it.

On the other hand, the consequences were not only negative. Financial reforms that followed laid out a base for safer, more stable financial systems in the future. The creation of the European Banking Union, the Single Rulebook and the European Systemic Risk Board led to better management of banks and universal rules for financial systems of member countries. As seen in 2023, such additions have been functional, as banking collapses nowadays have caused significantly less harm when compared with the late 2000s.

It is also important to look at the other policies implemented throughout the crisis. An important measure done to calm the hurricane was the collaborative effort between the European Union and the International Monetary Fund. Together, they provided financial support to struggling countries as well as suggested potential reforms. Together with other proposed reforms, such as the European Stability Mechanism, coordination between countries of the European Union improved, eliminating some of the issues presented above.

All in all, the Eurozone Crisis was largely caused by a mismanagement of debt by the member countries, as well as a financial system unprepared to manage the risks associated with the bursting of bubbles. What followed was extensive harm to equality and standards of living. However, this event proved to be an important incentive to change. Financial systems improved, the European guidelines became stricter and bank management became more risk-averse. Overall, the changes have been positive, and the financial system of the European Union became safer.

Works Cited

(1) “A Tale of Two Banking Crises: How 2008 Is Different than 2023.” Facet,

(2) Council on Foreign Relations. “Greece’s Debt Crisis Timeline.” Council on Foreign Relations, 2018,

(3) European Union. “History of the European Union 1990-99.”,

(4) Roser, Max, et al. “Economic Growth.” Our World in Data, 14 July 2023, Accessed 1 Aug. 2023.

(5) Shiller, Robert. “Case.” Wikipedia, 27 May 2021,

(6) (n.d.). Current account balance (BoP, current US$) - Spain | Data. [online] Available at:

‌(7) (n.d.). European Union Current Account to GDP - 2023 Data - 2024 Forecast. [online] Available at: [Accessed 12 Aug. 2023].

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