348 CHAPTER NiNE ■ InternatIonal Po lItI cal economy
t he 2009 eurozone crIsIs
As growth within the states in the EU began to slow or reverse because of the global
economic crisis, a crisis closer to home magnified the disequilibrium. In the early years
of the new millennium, easy credit had ushered in a de cade of risky borrowing and
profligate spending in some EU countries. International banks were eager to oblige
credit- hungry governments and individuals with low interest rates. In Greece, high
public- sector wages and long- term pension obligations fueled public- sector borrowing.
In Ireland and Spain, private- sector borrowing accelerated, similar to the U.S. hous-
ing bubble. Then, when the global economic crisis hit, house holds faced underwater
mortgages, foreclosures, and even bankruptcy. Many individuals whose net worth had
dramatically declined now faced the possibility of unemployment and declining wages,
only deepening the debt trap. And governments dependent on borrowing in inter-
national markets were turned away, deepening their debt obligations.
But the crisis was not just a debt prob lem. It was also caused by an imbalance of
trade. After the turn of the century, Germany’s export trade grew, while that of the
so- called PIGS (Portugal, Italy, Greece, and Spain) had worsening balance- of- payments
positions. Wages rose faster than gains in productivity, making their exports uncom-
petitive, while Germany’s wage restraint made German exports even more competi-
tive. Germany’s trade surplus is the world’s largest at $200 billion; 40 percent of that
surplus comes from trade within the Eurozone.
The arrangements within the Eu ro pean monetary union and within the Eurozone
itself made addressing the twin prob lems of unsustainable debt and trade imbalances
even more difficult. As its critics warned in the early days, how could the euro work
with no fiscal union and no trea sury? How could the Eurozone deal with economic
shocks affecting diff er ent subregions? Individual states do not have the ability to man-
age their monetary policy: they could not print more money, and they could not devalue
their currency to make their exports more competitive. Labor mobility was constrained,
and there were no agreed- upon procedures for transferring funds between states.^21
When the banks, including German ones, that had lent money liberally during the
credit explosion became stressed, they demanded higher interest rates from the PIGS,
making it more difficult for those governments to finance bud get deficits and ser vice
the existing debt, a prob lem compounded by low growth rates.
There have been more than 25 summits to address the Eurozone crisis. In response,
the PIGS undertook numerous reforms to reduce government debt, slashing expendi-
tures, increasing the retirement age, promising to improve the tax collection system, and
using financial transfers to avert bankruptcy. Greece has been the government in the
most severe crisis. The Global Perspectives box on p. 350–51 charts the Eurozone crisis
from the viewpoint of Greece.