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 Great Recession

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.

Sovereign Default

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.