Europe – from financial crisis to debt crisis In connection with the financial crisis of 2008–2009, problems relating to major budget deficits and sovereign debts became apparent in several countries: primarily in Greece, but also in Ireland, Spain and Portugal (see Figure 6). BIS central bankers’ speeches  1  One could say that the position of several countries was already too weak when the crisis began, but also that their situations differed somewhat in nature. Greece had long been struggling with a budget deficit and a high sovereign debt (see Figure 6). In the case of Ireland the sovereign debt was not so large when the crisis began, but the combination of a burst property bubble and a large banking sector meant that the costs of supporting the financial sector became enormous (see Figure 6) Since the end of last year, a number of support measures have been implemented by the ECB, the EU and the IMF. These measures have been vital to the effort to manage the acute problems. On the other hand, it is absolutely clear that neither the European Financial Stability Facility (EFSF) nor the other support programmes can do anything about the longterm problems. In the longer term, structural measures are instead required to strengthen competitiveness in the countries with debt problems. Costs have increased far too much in several of these countries (see Figure 7).
For example, Greece’s structural primary balance (that is, the fiscal balance adjusted for cyclical developments, interest payments and one-off factors) is estimated by the Commission to have improved by more than 13 percentage points. I acknowledge that the concept of cyclical adjustment is surrounded by large uncertainty in real time, but there is no doubt that quite a lot of progress has been made. At the same time it is positive to see that the general upward trend in private sector indebtedness has been halted, both in the household and the corporate sector. Last but not least, the structural reforms have gathered pace, possibly under the imperative of the crisis. The programme countries have taken many initiatives to make their economies more flexible and market-oriented, thus sowing the seeds for better performance in the future. These efforts include pension reforms, the fight against tax evasion, simpler and better tax revenue services, optimisation of tax structures and – not to be underestimated – politically difficult labour market reforms. All of these developments give reasons to be cautiously optimistic about the prospect for crisis-ridden countries’ return to a path of sustainable growth, productive investments and creation of new jobs with more social security than has been experienced in the past few years. The severe recessions and increases in unemployment in some euro area countries were caused by many years of misguided policies and lack of reforms that could have strengthened the growth potential.