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It's easiest to understand the Eurozone crisis by breaking it up into three

different phases.

In the first phase, which goes from December 2009 until July of 2011.

The emphasis is on weakness and bailout for

smaller countries that are on the periphery of the eurozone.

Specifically, Greece, Ireland, and Portugal.

In the second phase of the eurozone crisis, which goes from July 2011 to

July 2012 The crisis spreads to the larger countries of Italy and Spain.

And we see a double dip recession, meaning we had a recession, the global financial

crisis, we recovered and now we're gonna dip again, throughout the eurozone.

Phase three of the eurozone crisis begins in July 2012 and

goes to, well it's still going on.

And the problem here is mostly that

political systems in the countries of the eurozone have adjusted and adapted to

the policies that were put in place during the earlier phases of the crisis.

And now those political battles are playing out and we may see, we may yet

see the eurozone break up.

Anti-austerity political parties gained power throughout Europe.

Greece in particular is like the canary in the coal mine.

They had the strongest anti-austerity party come to power, and

periodically with each additional need of the bailout Greece is getting closer and

closer to completely leaving the eurozone.

Something that's known in the parlance as the Grexit or

the Greek exit from the eurozone.

Turning now specifically to the details of phase one of the crisis,

we see that each of the countries, Greece, Ireland, and Portugal, one by

one fell like dominoes to the pressures of the shock of the global financial crisis.

The first phase of the crisis really can be marked in December 2009 when

the new government in Greece acknowledged that their actual debt

was significantly higher than what was thought of under the previous government.

This isn't that unusual for countries, a new leader comes in and

they say that the past regime made mistake and we're acknowledging those mistakes.

But in this case, it's really a level of accounting irregularity that you don't see

at high levels of government really anymore in the 21st century for

developed countries.

But we saw it here that their debt was higher and their deficits were higher.

The debt measured at 300 billion Euros would be 113%

of GDP which far exceeds a eurozone limit set by the master

treaty in 1992 of just a 60% debt to GDP limit.

Now each year, countries would frequently miss their targets.

The target being any individual year having a deficit of less than 3% of GDP.

But there wasn't really a mechanism in place to punish countries and

get them to stop.

Just some moral suasion that would come from the center.

But overall once it was recognized just how severe the problems were in Greece,

this was no longer just about missing one year or two years of a target.

But rather the sustainability of their debt and

their ability to pay it off in the future.

If we think about what does 113% of GDP means or anything more than

100% means that you owe more than the total output of your country.

And historically, not many countries are able to pay that back.

We, of course do have counter examples.

Japan, a developed country with a very, very low interest rate,

is able to sustain debt levels around 200 percent without markets getting nervous,

but with a country like Greece where there's concern

about the management of the economy.

And the interest rates on the debt starts to rise,

a 113% debt burden can be very, very significant.

And it leads to market participants being concerned

about their ability to pay this debt back.

The Greek debt and deficits continue to be revised upwards

as various accounting problems are better understood.

In early 2010, this leads to heavy concerns about Greece and

also other indebted eurozone countries, most notably, Ireland and Portugal.

And remember Ireland and Portugal don't have the same root cause of problems.

They have the global financial crisis.

But in Ireland the main reason they face a debt crisis is that

they had a housing boom, their banks got in trouble, and

then their government came in, and guaranteed their banks.

The government was really unable to support the banks.

So now we're worried about the government being able to pay its debt back.

In Portugal it was much more about fiscal problems and slow growth.

Not so much about accounting problems or

irregularities in the measurement of the debt.

Nevertheless, all three of these countries are unable to, in the end,

deal with the shock of the global financial crisis.

And the concerns about them are eventually validated in a series of bailouts.

Led by a group of three, the International Monetary Fund,

The European Central Bank, and the European Commission, or

the collection of eurozone ministers, the finance ministers in this case.

These three groups are known the Troika, and

we will frequently hear about negotiations between debtor countries and the Troika.

The bailouts are first for Greece for 110 billion euros in May of 2010.

Next for Ireland, which requested a bailout And

received one of 85 billion Euros in November 2010.

And then finally Portugal for 78 billion Euros in May 2011.

This would be followed later on by further bailouts for Greece,

which will become important parts in phase two and in phase three of the crisis.

Importantly, the bailouts that are received are conditional.

So the Troika requires that they don't hand the money over all at once,

but rather they make payments at pre-specified times.

Conditional on the countries, following up on austerity programs,

the raising of taxes that are collection of taxes, and

the cutting of various types of government spending, and

then other types of market reforms, typically about the labor market.

So what we have here is not an unconditional here's money for

your debt, but rather, when every few months, as we hand out another dollop.

Another 12 billion euros here, or

25 billion euros there, we check to see whether or

not you've been following the program that you've been asked or required to follow.

It is exactly at those times, the handing

out a new piece of a bailout that we see periodic flare-ups of the crisis.

Because at each of these times, the question comes, have they,

usually what we've seen most often is Greece,

has Greece lived up to the terms of the agreement that they had.

And if there's concern that they have not led up to those terms, then there needs to

be a new negotiation around the time of that disbursement of the bailout funds.

It's at each of those times,

that suddenly you'll see a lot of articles appearing in the newspaper.

And a question about whether or not Greece will survive, for example, in the Euro.

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Lecture: Eurozone Crisis: Timeline, Part I

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