Eurozone Crisis: Toothless Maastricht Rules, Contagion and Draghi's Pledge

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The eurozone crisis grew from a design flaw: member states shared a currency and central bank but kept separate budgets, taxes and pensions. The 1992 Maastricht criteria capped deficits at 3 percent of GDP, but France and Germany were among the first to break the rule without penalty. Markets priced Greek and German bonds almost identically, sending cheap capital south and fueling property bubbles. In late 2009 Greece's new government revealed a 12.7 percent deficit and debt of 127 percent of GDP, rating agencies cut Greek debt to junk, and investors turned to Ireland, which had shifted bank debt onto taxpayers, Portugal, with weak growth, and Spain, with a collapsed property boom.

The Troika's first Greek package of 110 billion euros came in May 2010, and Ireland and Portugal soon needed rescues of their own, all tied to austerity. Greece's economy shrank 17 percent over six years and unemployment reached 27 percent, with youth unemployment above 50 percent in parts of Greece and Spain, and governments fell in Greece, Ireland, Portugal, Italy and Spain. The turning point came in summer 2012, when ECB president Mario Draghi said in London the bank would do whatever it takes to preserve the euro, backed by the Outright Monetary Transactions program. Ireland and Portugal exited their programs in 2014, and in June 2026 the European Commission removed Greece from its macroeconomic imbalances list.

• Bond spreads over Germany exploded as fear raised borrowing costs, which in turn justified more fear.
• The ECB cut rates to record lows and eventually below zero, charging banks for hoarding cash.
• Angela Merkel said institutions bailed out with public money were now exploiting the budget crisis.
• Some European officials claimed U.S. and UK traders and media coordinated to collapse the euro, a theory The Economist rejected.
• The IMF later admitted austerity hurt the Greek economy more than its models projected.