Economic policy in the EMU during the Great Financial Crisis and the Great Recession were comparable with developments in other countries, for example the United States. But the further development in the EMU is very specific. It reflects the lack of central institutions in the EMU and the inability to find joint reactions to fight the crisis in the interest of the whole EMU. The fragility increased to such an extent that in 2012 there was the danger that the euro area would fall apart.

No comprehensive lender of last resort for public households

Fresh adversity emerged in Europe at the end of 2009. Even during the upswing before the Great Recession, Greece had high budget deficits and a high national debt. In 2009, Greece's budget deficit increased to almost 15 per cent and its public debt to around 130 per cent of GDP. From the end of 2009, doubts also arose about the accuracy of the statistical figures provided by Greece.

Greece was only the tip of the iceberg, and other countries, especially Spain, Portugal and Ireland, were increasingly caught in a crisis maelstrom. These countries had demonstrated sound fiscal policy before the Great Recession, Spain and Ireland had even realized budget surpluses. The problem was a different one. The no-bail-out clause of the Maastricht Treaty hung like the sword of Damocles over the countries. They could not expect help from other EMU countries in case of financing problems of public households, and the ECB was strictly forbidden to help public households. In a self-fulfilling prophecy, doubts in financial markets as to whether public debt could be serviced led to liquidity problems in some of the member states of the EMU.

Consequently, interest rates for credit to public households with potential finance problems started to escalate (see Figure 7.2). It was only a matter of time before governments themselves would become illiquid. They were indebted in their own currency, but the design of the EMU made them look as if they were indebted in foreign currency. In fact, they no longer had their own central bank, which in any normal nation state could have acted as lender of last resort through direct credit or indirectly through purchases of government securities on secondary markets.