A few years ago, the Eurozone witnessed its most acute “stress test” since the euro became the official currency of a bloc of 11 European countries, gradually extended to include 19 nations as of May 2020. It was an asymmetric chock with its epicentre in Greece, testing the resistance of the Eurozone “weakest links” which were dubbed by financial investors with the infamous PIIGS acronym – standing for Portugal, Italy, Ireland, Greece and Spain. Given the complex and somewhat shaky institutional undertakings of the Eurozone at the time, and given the intricate linkages between sovereign entities and financial institutions all across the area, there was a real threat that the entire Economic and Monetary scaffolding put in place in the early 2Ks could collapse, with unimaginable consequences.
Comparing the growth of GDP per capita in constant prices between the Eurozone and the United States over the period starting from 2011, the impact of the sovereign debt crisis is striking. The lost output per capita stemming from that crisis exhibits an almost permanent character, as can be seen from the chart below. That major chock now seems to be dwarfed in scale and scope by the potential consequences of the Great Lockdown, as the Covid-19 induced economic and financial crisis came to be the named by the IMF.
In retrospect, the swift reaction of the ECB in the wake of the sovereign debt crisis managed to prevent the potential collapse of the Eurozone and to contain its fragmentation … for some time. This reaction will forever be associated with Mario Draghi’s momentous “Whatever it takes” sentence, pronounced during a speech held in London in July 2012. A week after that speech, the ECB announced a programme to buy potentially unlimited amounts of individual Eurozone countries distressed bonds, known as Outright Monetary Transactions. As a matter of fact, this programme was never actioned as it came with heavy strings attached, most notably the need to request a loan from the European Stability Mechanism and to be submitted to Greek-style conditionalities. But its mere existence was enough to calm the nerves of the markets and to thwart speculative attacks against the PIIGS countries.