The Eurozone in 2011

Abstract

The year 2011 saw the eurozone sovereign debt crisis go from bad to considerably worse. Although budget deficits fell in almost all Member States, continued concerns over debt sustainability and the fragility of eurozone banks contributed to a sharp slowdown in economic growth, which, in turn, cast doubt on the credibility of further fiscal consolidation. These tensions came to a head in Portugal in March 2011 after the government failed to win approval for its deficit reduction plans against the backdrop of a double dip recession. Rising interest rates on government debt and downgrades by the three major ratings agencies saw Portugal become the third eurozone member, after Greece and Ireland, to seek financial support from the European Union (EU) and the International Monetary Fund (IMF) – a package of loans worth €78 billion being agreed in May 2011. Greece’s precarious public finances remained a real and present danger for the eurozone in 2011. Facing widespread social unrest over the scale of budget cuts and a deepening recession, the authorities in Athens struggled to stick to the terms of the EU–IMF financial support package agreed in May 2010. A round of further expenditure cuts and emergency revenue-raising measures in 2011 ensured that this support continued to flow, but it was by now clear that more needed to be done to avoid a disorderly default by Greece with potentially disastrous consequences for the rest of the eurozone. The tentative offer of a second round of EU–IMF loans, combined with a preliminary deal on private sector involvement in debt restructuring, failed to convince financial markets, with only George Papandreou’s resignation as prime minister in November 2011 and the appointment of a caretaker government led by former European Central Bank (ECB) Vice-President Lucas Papademos bringing some semblance of calm. Running reforms to eurozone governance were another feature of 2011. In January, the new European Systemic Risk Board (ESRB) held its inaugural meeting, thus beginning a bold new experiment in pan-European financial supervision. In February, the heads of state or government signed a treaty establishing the European Stability Mechanism (ESM) – a permanent successor to the ad hoc Financial Stability Facility (ESFS) created in May 2010. This was followed in March 2011 by a final agreement by the European Council on changes to Article 136 of the Treaty on the Functioning of the European Union (TFEU) to ensure the legality of the ESM. November 2011, meanwhile, saw the entry into force of the so-called ‘Six Pack’ – a set of six legislative reforms designed to reinforce the Stability and Growth Pact and other aspects of eurozone governance. Within a month, all EU Member States (except the United Kingdom and the Czech Republic) had agreed on an additional, intergovernmental treaty – the Fiscal Compact – designed to reinforce Member States’ commitment to fiscal discipline and foster closer economic policy co-ordination. JCMS 2012 Volume 50 Annual Review pp. 178–194 DOI: 10.1111/j.1468-5965.2012.02270.x bs_bs_banner