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Crisis in the Eurozone

Understand the root of the eurozone crisis.

By Costas Lapavitsas and others
16-minute read
Crisis in the Eurozone by Costas Lapavitsas and others

These blinks explain the root of the eurozone crisis in a comprehensive, methodical way. They shed light on the deep structural problems the eurozone is facing and outline scenarios that could help restore competitiveness among the southern peripheral states of the region.

  • Anyone who wants to better understand the eurozone crisis
  • Anyone interested in macroeconomics
  • Anyone interested in fiscal policy

Costas Lapavitsas is a professor at the University of London’s School of Oriental and African Studies. He is also a member of the Research on Money and Finance (RMF) think tank.

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Crisis in the Eurozone

By Costas Lapavitsas and others
  • Read in 16 minutes
  • Contains 10 key ideas
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Crisis in the Eurozone by Costas Lapavitsas and others
Synopsis

These blinks explain the root of the eurozone crisis in a comprehensive, methodical way. They shed light on the deep structural problems the eurozone is facing and outline scenarios that could help restore competitiveness among the southern peripheral states of the region.

Key idea 1 of 10

Higher inflation rates explain why some countries suffered more than others in the eurozone crisis.

The economies in the eurozone area are all connected, but when the euro crisis hit Europe in 2009, different countries were affected in different ways. Some countries, like Germany (in the core of the eurozone), fared better than others, like Greece (on the periphery).

What caused the differing impacts of the crisis?

We can’t attribute the phenomenon to GDP growth rates, because these were similar across the eurozone.

The GDP growth rate is a metric that helps determine a country’s economic health: GDP is a barometer for how much a country produces over a period of time; its growth rates describe the increase in output from one period to the next.

In the eurozone, countries experienced similar GDP growth at the beginning of the 2000s. Greece’s GDP growth rate was about 4 percent, whereas Germany’s was 3.7 percent.

So if GDP growth wasn’t a factor, can unemployment rates explain why Germany fared better than Greece?

Unfortunately, they can’t either. In 2006, 8.9 percent of people in Greece were unemployed whereas Germany’s unemployment rate was at 11 percent.

Thus, just like GDP growth rates, unemployment rates can’t explain the disproportionate impact of the eurozone crisis.

However, there is one thing that can explain the imbalance: Germany and Greece had vastly different inflation rates, which turned out to be harmful for Greece’s economy.

Inflation rates refers to how much prices increase over time. In 2006, Greece had an inflation rate of 3.2 percent while Germany’s was 1.58 percent, or half of that.

The higher rate of inflation meant that Greek products were more and more expensive in comparison to German products, which made Greek companies less competitive.

So higher inflation rates were a big reason that Greece was hit so hard by the eurozone crisis. But what was causing them?

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