• Post-Crisis Reflections on Europe
  • The U.S. Housing Market Finds a New Normal
  • Vaibhav Tandon reflects on the eurozone’s experience since the financial crisis.

    I attained my bachelor’s degree in foreign trade in 2008. I got hooked on economics in college, as I was attracted by the prospect of learning a science that could explain human behavior and offer the hope of making predictions about the future.

    A year later, my interest in the subject prompted me to pursue a postgraduate degree in economics in the United Kingdom. I believed that by the by the time I graduated, the job market would have recovered enough to offer me long-term career prospects there. That hope went unfulfilled. The financial crisis proved much more difficult for Europe than it was for the US, and you can still see signs of it today.

    In Europe, the crisis started to unfold on August 9, 2007. The European Central Bank (ECB) injected €95 billion into the banking system following BNP Paribas’ suspension of three of its investment funds. One year later, Lehman Brothers fell, and the contagion accelerated.

    European banks suffered mightily. As a group, they were more undercapitalized than their American counterparts: their assets-to-equity ratio averaged 25%, compared to around 10% for U.S. banks in 2008. Tight linkages between national governments and their national champion banks had impaired the effectiveness of financial oversight and allowed excesses to develop. The ECB had not yet been given the authority to supervise banks.



    National authorities were forced to take significant ownership stakes in a number of institutions to prevent them from failing. While some divestiture has taken place, government ownership of European banks remains significant in some cases.

    Unlike the U.S., the European Union’s (EU) response to the crisis was slowed by a complex structure of economic governance. On the fiscal side, the eurozone was unable to use counter-cyclical spending to buffer the economic aftershocks of the crisis. In many countries, years of unsustainable government policies created huge deficits and high debt levels, well beyond the criteria set out in the Maastricht Treaty. Over-indebted European nations like Portugal, Greece and Ireland were at risk of bankruptcy and required emergency assistance. Countries with strong fiscal positions, like Germany, have been reluctant to extend themselves for the common good.

    The European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism, helped member nations in severe financial distress. This program provided needed funding (through the issuance of EFSF bonds and other instruments) to sustain Greece, Ireland, Portugal, Spain and Cyprus.