During the European debt crisis, several eurozone countries were confronted with high structural deficits, a slowing economy and expensive rescue operations that led to rising interest rates, which exacerbated the weak positions of these governments. In response, the European Union (EU), the European Central Bank and the International Monetary Fund (IMF) launched a series of rescue operations in exchange for reforms that ultimately succeeded in lowering interest rates.
The problem arose because many of the peripheral countries had asset bubbles in the time that led to the Great Recession, with capital flowing from stronger economies to weaker economies. This economic growth led policymakers to increase government spending. When these asset bubbles came out, this resulted in huge bank losses that caused bailouts. The rescue operations aggravated the deficits that were already large due to lower tax revenues and high spending levels.
There were concerns about the government’s default because rising interest rates led to even greater deficits; interest charges increased, with investors no longer confident in the ability of these countries to pay and pay the debt. At the moment there was a major political struggle going on within the EU. Some argued that the countries had to be rescued, while others insisted that rescue operations could only come if the countries embarked on serious tax reforms.
This became the first major test for the EU, and there was uncertainty as to whether it could survive. The debate was more about politics rather than economics. In the end both sides were compromised. Hiddenda Gabler-rich reforms were implemented in exchange for rescue operations. From 2015, the sovereign returns in all countries except Greek Hedda Gablerand have returned to normal.