Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 22 Issue 2

Source: Bloomberg, 2014 Figure 1: Budget Deficit 1991-2014 Beside the macroeconomic challenges within the Eurozone, the financial crisis which started in the US in 2007 had significant impacts on Europe. The bankruptcy of Lehman Brothers, the biggest securitisation provider in the US, led to soaring investor’ uncertainty and difficult cross-border access to liquidity between banks. Likewise, due to high exposure of European financial institutions to losses in the US, EMU countries’ banking system faced serious problems. Hence, governments had to support domestic financial institutions. For instance, Ireland’s banks were destructed so the government provided two-year liability guarantee to banks in Ireland. Additionally, governments set up subsidies, such as the “Abwrackpraemie” in Germany for the automotive sector, to boost growth and prevent economic recession (BAFA, Bundesamt für Wirtschaft und Ausfuhrkontrolle, 2014). However, as the Eurozone’s economy slowed down (GDP fell to -5.5% in the first quarter of 2009) and countries continued their intensive borrowing, their total debt increased even more as shown in Figure 2. Source: Bloomberg, 2014 Figure 2: Eurozone: Real GDP vs. Government Debt The culminating event of the sovereign debt crisis happened in October 2009 when Greece announced a much higher than expected annual deficit to GDP forecast (Lane, 2012, pp. 49-67). The country had changed political legislation, and revised its forecast from 6 % to 12.7%. Although in the past European economies’ high budget deficits did not result in negative reaction from the markets, Greece’s official announcement increased concerns about the fiscal irresponsibility of peripheral countries (Bernoth and Von Hagen et al., 2012, pp. 975-995). Lessons Learned from European Sovereign Debt Crisis 56 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals