Many researchers believe that the European debt crisis was caused exclusively by the onset of the global financial crisis. They believe that, before the crisis began, the level of public finance deficit in peripheral Eurozone countries was low and that their public debt was relatively stable. This, however, is not true, for the countries in question were unable to maintain fiscal discipline, while the stimulation schemes applied have led them to the brink of insolvency.
Greek bonds – just as good as German bonds
When in 1992 the decision to establish the Eurozone was adopted in Maastricht, the yield on treasury bonds of most countries of the European Union was at a similar level. The sole exceptions were Italy, Portugal and Spain, the yield on treasury bonds of which was 4-6 percentage points lower than in Germany, as well as Greece, whose spread with respect to German bonds exceeded 16 percentage points.
In Ireland, the yield in question, at 1 pp., was significantly lower, yet higher than in the remaining EU Member States. For this reason, much like in the case of other studies in which the definition of peripheral states is based upon the assessment of credit risk following the onset of the global financial crisis, we consider Ireland to be one of the EU-12 peripheral states. Having verified, however, whether such classification of this country has any significance for the conclusions we have drawn, we may now conclude that it certainly does.
The details pertaining to the establishment of the Eurozone were agreed upon in December 1995. Within the following 3 years, the spreads between the treasury bonds of individual EU-12 states have decreased to a mere 20 basis points. This, however, did not apply to Greece, where the process of the disappearance of spreads lasted two years longer. Until the beginning of the debt crisis in 2009, the governments of peripheral states were able to borrow money at a cost which was as low as it was in the case of Germany.
As a result, in years 1996-2007, the difference between interest rate and the GDP growth, which is of key significance for the purposes of fiscal stability assessment, attained a negative value in peripheral states. This made it possible for them to borrow money and even to repay the interest accrued without the fear of debt explosion. This is because the accrual of interest on the debt made it grow at a pace that was lower than the pace of growth of the economies of the countries in question.
