Triple Crisis Euro

The Euro’s Three Crises

Brookings Papers on Economic Activity Spring 2012

March 12th 2012

Jay C. Shambaugh

McDonough School of Business, Georgetown University

and NBER

abstract: The euro area faces three interlocking crises that together challenge the viability of the currency union. There is a banking crisis – where banks are undercapitalized and have faced liquidity problems. There is a sovereign debt crisis – where a number of countries have faced rising bond yields and challenges funding themselves. Lastly, there is a growth crisis – with both a low overall level of growth in the euro area and an unequal distribution across countries. Crucially, these crises connect to one another. Bailouts of banks have contributed to the sovereign debt problems, but banks are also at risk due to their holdings of sovereign bonds that may face default. Weak growth contributes to the potential insolvency of the sovereigns, but also, the austerity inspired by the debt crisis is constraining growth. Finally, a weakened banking sector holds back growth while a weak economy undermines the banks. This paper details the three crises, their interconnections, and possible policy solutions. Unless policy responses take into account the interdependent nature of the problems, partial solutions will likely be incomplete or even counterproductive.

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