A:

During the European debt crisis, several countries in the Eurozone were faced with high structural deficits, a slowing economy and expensive bailouts that led to rising interest rates, which exacerbated these governments' tenuous positions. In response, the European Union (EU), European Central Bank and International Monetary Fund (IMF) embarked on a series of bailouts in exchange for reforms that were eventually successful in decreasing interest rates.

The problem originated as many of the periphery countries had asset bubbles in the time leading to the Great Recession, with capital flowing from stronger economies to weaker economies. This economic growth led policymakers to increase public spending. When these asset bubbles popped, it resulted in massive bank losses that precipitated bailouts. The bailouts exacerbated deficits that were already large due to decreased tax revenues and high spending levels.

There were concerns about sovereign default as rising interest rates resulted in even bigger deficits; interest rate expenses grew, with investors losing faith in these countries' ability to service and pay the debt. At this time, there was a large political battle going on within the EU. Some argued the countries needed to be bailed out, while others insisted bailouts could only come if the countries embarked on serious fiscal reform.

This became the first major test for the EU, and there was uncertainty whether it would be able to survive. The debate became more about politics rather than economics. Eventually, both sides compromised. Significant reforms were put in place in exchange for bailouts. As of 2015, sovereign yields in all countries, except for Greece, have returned to normalcy.

RELATED FAQS
  1. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    Learn how a country's debt crisis affects the world, including how currency values, inflation and output are affected on ... Read Answer >>
  2. What are the similarities and differences between the savings and loan (S&L) crisis ...

    Learn about some of the similarities and differences between the savings and loan crisis and the subprime mortgage crisis ... Read Answer >>
  3. Which countries run the largest budget deficits?

    Discover the countries with the largest budget deficits and what it means. Deficits are influenced by the economy and also ... Read Answer >>
  4. How do government bailouts increase moral hazard?

    Learn how government bailouts increase moral hazard by shifting the responsibility of bad behavior from guilty executives ... Read Answer >>
  5. Why do some analysts argue that trade deficits aren't bad for the economy?

    Understand the reasons why trade deficits, reviled by many economic analysts, are not always a bad thing in the eyes of many ... Read Answer >>
  6. What is the long-term sector outlook for financial services?

    Read about a few potential threats to the remarkable levels of growth in the financial services sector that have occurred ... Read Answer >>
Related Articles
  1. Investing

    How A Greece Crisis Affects The U.S.

    Greece's ongoing financial crisis poses a threat to the nascent U.S. economic recovery due to the latter's close ties with Europe.
  2. Insights

    Will Germany's Bailout Save Europe?

    Germany has committed even more money to what may prove to be a fruitless cause.
  3. Insights

    What Are The Advantages Of Not Adopting The Euro?

    European Union countries that do not use the euro have a few advantages over eurozone countries. Investopedia explores how.
  4. Insights

    Eurozone Gains Momentum--But Can It Last?

    Eurozone economic growth has picked up, most notably in France and Italy, but can it last, particularly as Greece continues its standoff with creditors?
  5. Insights

    Understanding the Downfall of Greece's Economy

    Greece has defaulted on its debt. Such an unprecedented event has left many wondering how Greeceā€™s situation ever got so messy.
  6. Insights

    Top 6 U.S. Government Financial Bailouts

    U.S. bailouts date all the way back to 1792. Learn how the biggest ones affected the economy.
  7. Insights

    Is The EU Holding Germany Back?

    As Germany agrees to initiate bailout talks with Greece once again, could all of the EU's economic turmoil result in Germany being better off alone?
  8. Financial Advisor

    3 Global Economic Challenges for Investors in 2016

    Read about areas of concern for the global economy in 2016. See how China's economy may be slowing down, although it is difficult to get an accurate picture.
  9. Insights

    How Governments Influence Markets

    The biggest influence in the markets today can create some unintended consequences.
  10. Investing

    Top 6 Most Indebted Countries (And Why)

    Is the U.S. debt as bad as it sounds? Take a look at these European countries, and the U.S. doesn't seem so bad.
RELATED TERMS
  1. European Sovereign Debt Crisis

    During the European debt crisis several countries in the eurozone ...
  2. European Monetary System - EMS

    A 1979 arrangement between several European countries which links ...
  3. Grexit

    Grexit, an abbreviation for "Greek exit," refers to Greece's ...
  4. Austerity

    A state of reduced spending and increased frugality. Austerity ...
  5. Too Big To Fail

    The idea that a business has become so large and ingrained in ...
  6. Sovereign Debt

    Bonds issued by a national government in a foreign currency, ...
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  3. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  4. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  5. Risk Averse

    A description of an investor who, when faced with two investments with a similar expected return (but different risks), will ...
  6. Indirect Tax

    A tax that increases the price of a good so that consumers are actually paying the tax by paying more for the products. An ...
Trading Center