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Economic Crisis in Europe

Police and protest
2 Euro Coin

“Europe will be forged in crises, and will be the sum of the solutions adopted for those crises.”

— Jean Monnet, father of the European Union, 1976

2.1 The Issue

Since 2010, many European economies have struggled with high debt and low economic growth. The problem has been particularly acute in the eurozone, the group of nineteen European Union (EU) countries that use the euro as currency. (All eurozone countries are in the EU, but not all EU countries use the euro.) Many countries neighboring the eurozone have endured financial crises since 2010—most notably Greece, but also Cyprus, Ireland, Italy, Portugal, and Spain. Although the height of the eurozone crisis has passed, indebted governments, banks, and corporations continue to be a feature of many eurozone countries, a situation that could lead to more crises in the future. The economic downturn spurred by the COVID-19 pandemic in 2020 and the vast government spending to combat it has further underscored these weaknesses.

One possible source of a reignited financial crisis in Europe is the banking sector. Banking crises can be particularly dangerous. Financial institutions and markets are built on confidence: if one bank fails, customers could panic and pull money out of other banks so that failure snowballs. Moreover, financial institutions and markets are global; a banking crisis in one country can quickly spread to others. The Great Recession of 2007–2009 began as a banking crisis when the U.S.-based investment firm Lehman Brothers went bankrupt. Banking crises are also destructive because they can lead to a vicious cycle of economic problems, also known as a doom loop: when banks need governments to bail them out (i.e., provide money and resources to save them from failing), governments (sometimes already overindebted themselves) run into financial problems of their own, endangering confidence in the entire economy.

Eurozone banks have now recovered from the worst period of weakness (between 2010 and 2015). A return to steady economic growth in the eurozone in 2017 strengthened the banks, as did cheap credit from the European Central Bank (ECB) and injections of money and resources from governments. Even so, Europe’s banks are not out of danger. In an effort to increase confidence in financial institutions, organizations such as the ECB have begun work on protective measures to insure bank deposits—but these measures are incomplete. A banking crisis in a core country such as France, home to some of Europe’s largest banks, could have catastrophic effects on neighboring economies and even spread to the United States and beyond.

Decision Point

NSC Meeting


One of the largest French banks, which has extensive international operations, lost access to short-term debt markets three days ago, meaning that it can no longer borrow and lend temporarily (one year or less) and could therefore be unable to fund its daily operations. Fearing that the bank lacks the money to repay its loans, international creditors (primarily large banks in various countries) have refused to let the bank delay its loan payments or to make new loans to cover its needs. Facing a mountain of immediate debt payments it cannot make, the bank has requested extraordinary financial support and signaled that it will need to declare bankruptcy if the support is not immediately forthcoming. Other French lenders are heavily exposed to the failing bank and are likely to go bankrupt if they cannot collect on their loans to it.

However, the costs of bailing out its banking system are expected to be too much for the already-indebted French government. It has been looking for a buyer to take over the ailing bank, but no bank large enough has come forward. In advance of the anticipated bankruptcy announcement, depositors both in France and across Europe have been lining up at ATMs to withdraw their savings (a phenomenon known as a bank run). This crisis of confidence has spread to banks elsewhere in the eurozone, particularly peripheral countries.

The National Security Council is meeting to determine a U.S. response to the bank run. The fragility in Europe threatens to infect some U.S. banks that hold the debt of endangered French banks. The EU is the United States’ largest trading partner and has long been helpful in addressing global political challenges. Given that Europe is expected to enter a fresh economic downturn as a result of the banking crisis and that EU unity and the eurozone is being challenged by the rise of extremist anti-EU parties in many countries, U.S. interests in the region could be severely damaged.

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