The Eurozone Crisis: The Forgotten Risks of Private and External Debt

Greetje Frankena, Daan Willebrands, John Lorié and Daniel Bosgraaf

The financial crisis that hit the US and Europe in 2007–08 caused an economic recession much more severe and protracted than any other since the Great Depression of the 1930s. In the eurozone in particular, countries are still struggling with the aftermath of the so-called great financial crisis. This chapter will address a number of key questions related to this economic crisis by analysing developments across the eurozone. Why did it occur in the first place? Why was it so severe and protracted? What has been done about it? Can future crises be prevented by the new insights obtained? What lessons can be drawn for country risk analysts?

This chapter will argue that important elements have been missing in the analysis of economic events in the run-up to the crisis, and arguably too long thereafter. In the eurozone context, these elements are, first, a fundamental lesson from long ago by Fisher (1931) and later Minsky (1986), which appears to somehow have been forgotten: the importance of private debt; and, second, that the relevance of the extent of debt financed abroad – ie, external debt – seems to have also been overlooked.

One reason for the latter lesson being forgotten