Brexit: The Euro Crisis
Prior to the Euro Crisis, the Economic Monetary Union was founded on two basic policy areas:
Monetary Policy - The power to create monetary policy was transferred from national level to EU level so that the European Central Bank would be the ones making the key decisions about interest rates and the money supply.
Fiscal Policy - This remained at the level of the member states. They retained control over their own national tax rates and Government spending.
The Euro Crisis was a period when several European countries experienced a collapse of financial institutions, and high government debt. The crisis began in 2008, Iceland’s banking system collapsed, this had a domino effect on other countries, first Portugal, then Italy, Ireland, Greece, and Spain in 2009. This led to a loss of confidence in European businesses and economies.
Eventually, the financial guarantees of the European countries managed to control the crisis with the International Monetary Fund. They feared the collapse of the Euro and financial contagion.
So why did the crisis happen?
Some of the causes included:
The Financial Crisis of 2007 – 2008
The Great Recession of 2008 – 2012
This was a sharp decline in economic activity during the late 2000’s, it is considered one of the most significant economic downturns since the Great Depression. It officially lasted from December 2007 to June 2009, and the real slump of the recession began when the U.S housing market bust as large amounts of mortgage-backed securities and derivatives lost significant value.
The real estate market crisis
The property bubbles in several countries.
A bubble is an economic cycle that has a rapid escalation of market value, especially in the price of assets. This fast inflation is then followed by a quick decrease in the value, this is in effect, where the bubble bursts.
Domestic fiscal policies also contributed to the crisis.
At the end of 2009, the peripheral Eurozone members effected by the crisis first (Greece, Spain, Ireland, Portugal, and Cyprus) were unable to repay or refinance their government debt or bail out their own banks without third party assistance, these included the European Central Bank, the IMF, and the European Financial Stability Facility (later replaced by the European Stability Mechanism).
Lenders started demanding higher interest rates as fears of excessive sovereign debt started to grow. Greece revealed in 2009 that its previous government had underreported its budget deficit, this was a violation of EU policy and prompted the fears of growing debt into action. In 2010, 17 countries then voted to create the European Financial Stability Facility, this was tasked with addressing the crisis and helping the countries come through it. Increased interest rates where financed by increasing taxed and cutting expenditure, this then contributed to the social dissatisfaction across these borders and ultimately a crisis in confidence of the leadership in Greece.
In the end Greece remained a part of the EMU and began to slowly show signs of recovery in the years following, unemployment dropped from 72% to 16% in five years, and annual GDP grew from a negative to over 2%.
The situation for Ireland, Portugal, and Spain improved by 2014. This was because of the various fiscal reforms, domestic cutting measures, and other unique economic factors accessed by being a part of the EU.
Italy, however, are still struggling. The market volatility triggered by Brexit, governmental decisions, and a poorly regulated financial system worsened the situation for the banks in Italy in mid-2016. 17% of Italian loans needed significant bailouts.
In June 2016, the UK decided to leave the EU, this decision has left many countries wondering what will happen once a country has left the guardianship of the EU. Many media platforms claimed that once the UK had triggered Article 50, many other countries would look to do the same, Brexit took place at 11pm on January the 31st 2020, so far, no other countries have precipitated any sort of indication that they will follow the UK.
It is a common theory that the UK decided to leave the UK because of the Euro crisis, campaigns described the Union as being a “sinking ship”. But the referendum sent the economy surfing as investors fled meaning that government yields were sent to into a negative value, the British pound then dropped to its lowest level against the dollar since 1985. It then bounced when investors ran out of options due to the negative yields and so the S&P which had plunged, managed to recover.
The question of whether the euro crisis caused Brexit is still up for debate. It is unlikely that there will ever be a single reason that is concluded on. The decision to leave the EU seems to be more of a social one, rather than an economic one. But eventually, time will tell whether it was a good decision or not.