This week ten years ago, Greece was on the brink of exiting the euro. The integrity of the currency union was again in jeopardy after the crisis of 2010-12. This column reflects on how political responsibility (including the determination of the Greek people to remain in the euro area), institutional determination, and behind-the-scenes arm-twisting eventually prevented Grexit. A potentially catastrophic outcome for Greece, the euro area, and the EU was averted. Ten years on, faced with tectonic shifts in global governance, Greece is doing well, the euro is more resilient, but the job of a making a more perfect monetary union is still not completed.
Ten years ago, the three weeks between 25 June and 12 July 2015 shook the euro area and are arguably among the most momentous of its 25 years of history. The euro area had already gone through a period of crisis in 2011/12 when a number of countries (at that stage, Ireland and Portugal next to Greece) had effectively lost market access. That shock had led to significant institutional innovations in the euro area (not least the European Stability Mechanism, or ESM, and a single banking supervisor). Therefore, 2015 came as a shock, given the political and economic and institutional reforms that had been put on track.
The peculiar events of the summer of 2015 started with the surprise call of a referendum on the rescue programme under discussion, with the government calling for rejection of the Troika-led proposals, and ended with a politically very arduous compromise between the Greek government and the creditors, which averted Greece’s exit from the euro area as proposed in a memo put forward by the German Finance Minister, Wolfgang Schäuble.
It is not our intention in this column to review in detail the unfolding of the events in those three weeks. This has been done quite accurately in other accounts (e.g. Traynor 2015 and ESM 2019: Chapter 36, or, more thoroughly, Dendrinou and Varvitsioti 2019). More modestly, our goal is to draw some lessons for today’s European issues from this deciding moment, in a way the ‘whatever it takes 2.0’ in guaranteeing the integrity of the euro area.
On the origins of shocks
During 2010-12, the rescue programmes of the countries who were on the brink of default during the sovereign debt crisis were all politically highly contentious. A spurious coalition of debtors and creditors militated in delaying the day of reckoning: the countries under stress delayed the decision to apply for help given the expected severe conditionality and the perceived loss of sovereignty over its economic policies; the creditor countries preferred to step in at the last minute when the applying country stared into the abyss, because it was easier at that stage to convince national parliaments to grant the support.
More specifically, the euro area response was slow in coming, mainly for two reasons.
First, the Maastricht Treaty foresaw that euro area countries in difficulty could not be bailed out, largely in order to avoid countries engaging in fiscally unsustainable policies while relying on being helped in the end. Thus, in 2010 we not only had to contend with cognitive denial that the situation was bleak and dangerous, but also political resistance to acting in a solidaric manner.
Second, we also did not have the instruments to counteract the increasing difficulties that Greece (and others later) faced in financing the budget at acceptable rates. It took time and huge efforts to change the institutional and practical set up of the euro area in a manner that allowed us to resolve the euro area crisis. The belief in the 1990s that a highly integrated monetary union could not face a capital account crisis of individual member states had precluded the setting up of internal safety nets.
Initially, the institutional set up of EMU thus had four major gaps (Regling 2025): (1) the coordination of macroeconomic policies was too narrow and asymmetric, lacked enforcement procedures, and focused nearly exclusively on fiscal issues, with national statistics remaining a black box; (2) banking supervision and resolution, as well as deposit insurance, were a national prerogative; (3) in contrast to all other countries globally, there was no lender of last resort for sovereigns due to the limits the Maastricht Treaty had foreseen for the ECB; and (4) there was no procedure for private sector involvement (PSI), necessary when public sector debt becomes unsustainable, as happened in Greece in 2012.
However, what made the Greek programme uniquely complex was its origin: the cheating on the budget accounts which all of a sudden were revealed by the new Papandreou government, with the deficit jumping from purportedly being less than 3% if GDP in 2009 to over 15% (Papacostantinou 2016). This gave rise to what has been called the ‘moral hazard paradigm’ and an interpretation of the crisis via essentially fiscal lenses. One of us has argued (Buti 2021) that, had the euro area crisis started with another country, the unfolding of the events and the approach to the rescue programmes could have been very different. The moral hazard paradigm implied that mistrust set in, and the conditionality was designed in a stringent manner.
There has been a long debate on the correct size of fiscal adjustment in these circumstances. The deficit was astronomical and debt was high – what could be done in order to bring debt servicing costs into sustainable territory? Either one needed to provide debt relief of a substantial nature or cut spending and raise taxes respectively. With a 15% of GDP deficit, debt levels double in less than five years, so financing continued high deficits from official sources was not a feasible option. Given the political and institutional constraints of the euro area, the required fiscal adjustment was large and inevitably led to an output shock of significant proportions.
There was a widespread belief outside Greece that fiscal profligacy was the only source of the problems the country was facing. What increasingly emerged, however, was that the steady erosion of the competitiveness of the Greek economy had not been addressed by policies, and the subsequent problems had been papered over by policies that additionally drained the budget. Greek institutions – ranging from tax collection to the judiciary or cadastres codifying proofs of ownership of land – were inherently weak.
The implementation of the programme was affected by another, not unrelated Greek-specific factor: the lack of ownership of the programme on the part of the Greek political system (government and opposition). This became manifest with the Syriza government, but it is fair to acknowledge that it was already a feature of previous incumbents. This was more pronounced than in other programme countries (Ireland, Portugal, Spain, and, to a certain extent, Cyprus), where governments had been considerably more forthcoming about the origins of their crisis (i.e. past policy mistakes). This increased the perception within Greece that the country was being victimised. Unsavoury press reports in countries such as Germany did not help.
A break of trust
Developments had already deteriorated under the (conservative) Samaras government in 2014, when potential (further) debt relief hinged on successfully achieving a variety of policy milestones. The reform drive had diminished, following the vote in the June 2014 European elections. Milestones were eventually not met, with Greek politicians (and not only them) accusing – predominantly – the IMF of imposing impossibly strict conditions on Greece.
This was the backdrop to the electoral victory of Syriza in early 2015 and the participation of Yanis Varoufakis as Finance Minister in the deliberations and negotiations in the Eurogroup. This is not the place to recount happenings in the first months of the new government led by Alexis Tsipras (e.g. Dendrinou and Varvitsioti 2019), but instead to recall the political psychology that led to the events of early summer of that year.
Ultimately, Greece’s approach in those months could be described as a gamble. Greece assumed that if it did not enact any of the reforms of the programme, the euro area countries would at the last moment nevertheless provide the finance and debt relief to keep it afloat. The assumption was that the desire to keep membership of the euro area intact would outweigh the problems of acting against the principles of economic policy governance of the euro area and providing relief ‘for free’.
On the other side, there was increasing frustration at the antagonistic performance of Varoufakis in the many meetings of the Eurogroup. The complete standstill in talks to bring about a functioning assistance programme (ascribed variously to Greek or IMF intransigence) acted as a brake on economic developments in the country, already suffering from years of lack of access to capital.
Prime Minister Tsipras finally realised the political and economic costs of his Finance Minister’s tactics, but much of the damage had already been done. Distrust could hardly get any worse. The tactic of assuming that the other member states would agree to anything in order to keep Greece in the euro area had failed. As in 2012, there had been confidential detailed preparations in the institutions on what should be done if Greece were to leave the currency union. The difference to 2012 was that, this time around, it seemed as if Greece was the one doubting its future membership.
The situation came to a head in the three weeks from the end of June to mid-July 2015. The gamble of a referendum calling for rejection of the terms of the deal put forward by the Troika was met with an explicit call in a memo circulated by the German finance ministry that Greece should take a ‘temporary leave’ from the euro area. Schäuble’s aim – going back to a philosophical view of a multi-speed Europe put forward years earlier in a paper with Karl Lamers (Lamers and Schäuble 1994) and restated in a joint article in the Financial Times (Lamers and Schäuble 2014) – was to solidify the remaining membership by separating the ‘rotten apple’ from the rest.
The fear of the other vulnerable countries was, instead, that such a move would unleash speculation in the markets, giving rise to a domino effect which would risk tearing apart the euro area, or at best lead to a permanent weakening of EMU. That was also the view of the Commission, the ECB and the ESM: all the institutions expressed themselves against calling into question the integrity of the euro area. After a long and contentious debate in the Eurogroup, the ‘remainers’ eventually succeeded. The conditionality of the subsequent programme was stricter than it would have been half a year earlier as the belief that the Greek government would enact reforms without intrusive controls had evaporated after the antics of 2015.
Lessons learned
What lessons can we learn after ten years?
First, one can safely conclude ex post that the euro area avoided a potentially catastrophic mistake. The combination of the end of the Grexit debate and the subsequent Brexit, though with opposite outcomes, has laid to rest the threats or prospects of countries leaving the euro area or the EU. The problem today is rather that current EU members, when facing a choice they fundamentally disagree with, instead of considering, exit remain in the EU and undermine it from the inside (i.e. because they are net receivers of EU funds).
As far as the euro area is concerned, we now have an array of instruments that allow us to be confident about success if a similar crisis were to occur. We are strongly integrated in the field of banking supervision and resolution. The ESM is as ready as ever to provide liquidity to countries in trouble. And this goes, not least, for the practical changes to the ECB’s set of monetary policies, including Outright Monetary Transactions (OMT).
Second, the temptation to wait until a crisis has erupted to make a difficult but necessary choice is a very costly strategy. Typically, as the IMF has also experienced at the global level, countries go through the following decision-making cycle in the event of a shock: denial, half-hearted response, panic, courageous decisions, then complacency when the situation improves. Early action and completing the job should be the name of the game. Prevention is definitely more efficient.
Third, building trust is key for further integration. The Schäuble plan for a temporary leave-taking of Greece from the euro area was ill-conceived for two reasons: (1) it did not consider market psychology and the risks of contagion; and (2) it was built on the belief that a fiscal straitjacket like the German ‘Schuldenbremse’ was the solution to future problems arising from unsustainable fiscal policies.
Nonetheless, the call for rebuilding trust between member states as a precondition for closer integration was the right one and is still valid today. This should take the form of tight ‘vertical coordination’ between national budgets and the EU budget that would be the basis for enhanced risk-sharing (Regling 2025). The EU budget should be strengthened and reoriented to supply European public goods in economic and security areas, financed by issuing common bonds (Anev Janse et al. 2025).
Also, the idea of differentiated integration, where a number of EU countries form a vanguard and integrate further, without waiting for all 27 members before proceeding, appears of great relevance today. Schengen-type agreements are shaping up in the area of defence and could be experimented in chantiers that have been open for a long time, such as Capital Markets Union, now relabelled Savings and Investment Union (Draghi 2024, Letta 2024). The challenges here are, in the short term, avoiding the pitfall that differentiated integration does not give rise to integration à la carte, and, in the longer term, ensuring institutional coherence (see Beetsma et al. 2025 in the area of defence).
Sharing sovereignty ten years ago and now
The Grexit crisis of ten years ago shows in an acute way that sharing a currency is an existential choice: its political ramifications are highly encompassing both for a country under stress and for the rest of the Union. Responsibility and solidarity go hand in hand. But this implies that political integration cannot take place by stealth.
Clearly, the EU, and thus the euro area, are and will remain for the foreseeable future unions of member states that have ceded a certain amount of sovereignty to collective decision making. Ultimately, important responsibilities and powers remain with the national sovereigns. For instance, whilst most agree that moves towards completing the Banking Union are necessary, the present problems UniCredit is facing in taking over a German bank (and it is not the only contentious case in the EU) are a reminder of how hard the grip of national politics remains.
Nobody can ultimately force a member state to engage in economic policies that it does not wish to undertake, but the implications for other countries, and the Union as a whole, must be factored in. The tension between national constitutional sovereignty and the imperative to also act towards the interest and benefit of the Union makes policymaking more complex than is the case for other countries. However, the present geopolitical environment requires moving the needle between national and European sovereignty in favour of the latter. The Grexit showdown of ten years ago shows how high the costs can be when a move of the needle is forced by circumstances in a situation of lack of trust. There must be a better way.
Source : VOXeu
