You’ve probably heard one of your professors mention Greece’s ridiculous amount of debt or Spain’s sky-high unemployment rate. But just how did this great, big mess start anyway? Read on to discover the patented 5-step process behind every economic crisis, as demonstrated by members of the European Union.
- Borrow money…
Before the Eurozone was created, the cost of borrowing money was high for some of the weaker nations in the continent. The introduction of a common currency made it easier for these countries to borrow from other well-off nations. Between 2002 and 2008, it was incredibly easy to obtain credit and countries like Greece, Spain and Italy started taking on more debt than they could handle.
2. …but don’t pay it back
The countries that lent this money didn’t carefully examine their debtors’ creditworthiness. A lot of the borrowed money was spent on real estate, which drove housing prices up and created a real estate bubble. Once housing prices crashed, homeowners were left with mortgages that were worth way more than their homes.
3. Don’t ask for help
The nations at the heart of the Eurozone crisis are the “PIIGS” countries: Portugal, Ireland, Italy, Greece and Spain. Greece received the most attention at the start of 2010 when the country’s finance minister stated that Greece owed 300 billion Euros to its creditors. Later, it was revealed that Greece had mismanaged its finances in previous years and downplayed the severity of its problems. According to the BBC, former Prime Minister George Papandreou said “…it was ‘out of the question’ to resort to an International Monetary Fund loan.”
4. Share the wealth
After Greece admitted that it was in over its head, the European Union began to investigate the financials of its other members. Borrowing costs in Spain and Italy were rising sharply and their government bonds—traditionally a safe investment—were becoming riskier and riskier to invest in. This was especially troubling given that these two countries have the largest economies out of all the PIIGS countries. Unemployment was at record highs.
And last, but not least…
5. Panic
People were already hesitant to take on risk once the bad news about Greece came to light. But the realization that Greece wasn’t the only country in danger of defaulting on its debt spread fear throughout Europe. Once it became evident that these countries were in much more trouble than they seemed, banks and investors all but stopped lending money.
And there you have it—a recipe for your very own economic crisis.