Is a new euro crisis lurking around the corner?

If nothing changes, Greece is heading toward new economic troubles in the long run, says economist Han de Jong in his column on BNR.nl. Does this mean a new euro crisis is quietly looming? We called Maarten Lafeber, macroeconomist and senior strategist at APG, to find out.

How did the first euro crisis, which began in 2009, expose the vulnerabilities of the monetary union?
“Europe was economically weak at the time, partly due to the financial crisis that began in 2008. It was already known that Greece had a significant budget deficit, but it turned out to be much larger than anyone had expected. Foreign lenders began to question the country’s creditworthiness, and soon after, doubts spread to Portugal, Spain, and Italy. That was when tensions between northern and southern eurozone countries came to light, and people started talking about ‘neuro’ and ‘zeuro’ countries. The crisis highlighted the flaws in the monetary union.

When a country faces an economic crisis, it can devalue its own currency—or the market does it for them. If Greece had still had the drachma, it could have regained competitiveness through devaluation and gradually recovered. But with the euro, southern European countries were stuck with a strong currency they had little control over. That said, devaluation isn’t a magic bullet. Ultimately, Mario Draghi, then-president of the European Central Bank (ECB), stepped in with his famous words: ‘Whatever it takes.’ The ECB would continue injecting money into the eurozone until the crisis was resolved.”

What has changed since then?
“In addition to temporarily purchasing government bonds and ensuring liquidity, the ECB expanded its supervisory role. For example, the Single Supervisory Mechanism (SSM) was introduced to oversee major banks within the European Union—previously the responsibility of national central banks. This is one of several institutional reforms implemented since the euro crisis to make the eurozone more resilient.

Beyond banking supervision, mechanisms were created to wind down failing banks and provide emergency support to countries in financial distress. Budgetary oversight has also become both stricter and more flexible: tougher where necessary, but with more room for tailored solutions. That said, public debt levels in several countries are indeed higher than they used to be. But while debt levels are important, they don’t tell the whole story. The composition and sustainability of debt matter too.

If interest rates are low, the debt burden is eased. And if economic growth is strong, high debt isn’t necessarily a problem. The interplay between interest rates, economic growth, and budget deficits or surpluses is relatively stable in most eurozone countries—including Greece, where the government currently has more revenue than expenses, excluding interest payments. Debt isn’t inherently bad, especially if it’s used to invest in areas that drive economic growth. And that’s needed, because Europe’s competitiveness continues to lag behind the United States and China, as Mario Draghi noted last September.

His timing was perfect, as Donald Trump was elected two months later—the president who has little regard for free trade, which Europe heavily relies on. On top of that, we’re now dealing with a war on European soil. This has made European politicians more aware of the need for closer cooperation. Also, consider UK Prime Minister Keir Starmer, who is actively reaching out to the continent and seeking collaboration. Over time, we may even see further financial integration in the EU, such as eurobonds or a fiscal union.”

So are all signals green, or are there still risks for the eurozone?
“If a problem arises, it likely won’t be because Greece’s finances are out of order—though its debt remains high. Thanks to the loans it received during the crisis, Greece now has an exceptionally long debt maturity, so higher interest rates have little immediate impact.

In other eurozone countries like France, Italy, and Spain, the average debt maturity is much shorter. If interest rates remain high for an extended period, this could eventually put pressure on their public finances. These countries would then need to cut spending or find alternative sources of funding.

Aging populations also pose a major challenge for several European countries, especially Germany and France—the EU’s two largest economies. They operate on a pay-as-you-go pension system, where pensions are funded by the working population. If there are fewer workers relative to retirees, the system comes under strain.

In France, spending cuts and reforms often lead to political unrest. The new NATO spending norm of 5 percent and the need for infrastructure investments also mean higher expenditures for European countries. That could pose a risk to eurozone economies.

The good news is that the ECB has repeatedly proven itself to be a capable problem-solver. It resolved the euro crisis, improved oversight of the financial system, and kept European economies running during the COVID-19 pandemic. This has boosted investor confidence.

A new euro crisis can’t be ruled out. But if it does happen, it will likely take the form of a creeping threat—for example, if countries ignore the consequences of aging populations, if the new NATO norm leads to major spending cuts elsewhere, or if Europe continues to postpone addressing its declining competitiveness.”