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Remember The Financial Crisis?! – Europe

The Euro: Background

  • Evolved from previous pan-European institutions, with its formal name change and major steps towards union from the Maastricht Treaty in 1993
  • Monetary union commenced in 1999 with the euro as an accounting unit, and was completed with the introduction of physical euros in 2002.
  • This single currency is managed by the European Central Bank As of January 1, 2015, there were 28 members of the EU, of which 19 use the euro (“eurozone”).
  • There are several other countries that are part of the “single market” of the European economic area (EEA), or that use the euro as their currency without being part of the EU.


Policy Response

  • Shortly after the Lehman failure, Irish banks were on the precipice, unable to fund the external gap built up during the boom.
  • In September 2008, the Irish government made the most powerful response of any nation during the GFC: guaranteeing all liabilities for seven “covered banks” – a total of €375 billion, or about two times Irish GDP.
  • It was clear to markets that €375 billion was just too big of a burden for the Irish government.
  • Ultimately, Ireland required an international bailout in November 2010.


Iceland: Background

  • Tiny country of about 320,000 people, less than 10% the population of Connecticut
  • Dominated by three banks: Glitinir, Landsbanki, and Kaupthing (collectively, “GKL”)
  • After the Northern Rock run of September 2007, there was increased pressure on GKL, and the online accounts began a slow run (jog?).
  • After Lehman, the jog turned to a sprint, and GKL were unable to keep up their short-term funding. Iceland nationalized all three banks over the week of October 6.
  • Iceland’s deposit fund was insufficient to pay everyone back, and so they made the controversial decision to pay back only domestic customers.
  • The UK and the Netherlands made their own depositors whole, but were not pleased.



  • The causes and immediate consequences of the GFC were similar between Europe and the United States.
  • Ireland had a lending boom leading to a domestic house bubble, and the government’s aggressive actions to guarantee Irish banks backfired into a sovereign debt crisis.
  • Iceland built a financial center on foreign lending. The scale of losses were too large for the government to guarantee the system, so Icelandic banks were nationalized and defaulted on foreign depositors.
  • After 2009, the eurozone countries lurched from crisis to crisis, with intertwined banking, sovereign debt, and growth problems.



Special thanks to Timothy F. Geithner (Lecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury, Yale School of Management) and Andrew Metrick (Michael H. Jordan Professor of Finance and Management, Yale School of Management)