How the Global Financial Crisis Turned Into the European Debt Crisis

Discover how the Global Financial Crisis began, why it continued and spread, and where we are now, when you subscribe to World Politics Review (WPR). 

For several years after the Global Financial Crisis, the global economy remained fragile and vulnerable to shocks. Looking back at how the crisis unfolded over time can help you understand the different causes and effects of its various episodes—in particular, how the 2008 Global Financial Crisis and subsequent 2011 European debt crisis occurred due to two different types of “toxic assets.”  

World leaders at the G-20 Summit, Hangzhou, China, Sept. 4, 2016 (AP photo by Ng Han Guan). 

In 2008, it was short-term lending between banks—in many ways the lifeblood of the global financial system—which seized on fears that foolish investments in valueless mortgage-backed securities might cause a loan partner to collapse. The U.S. Treasury recognized that in order to get credit flowing again, that bad debt had to be cut out of the system. Enter the Troubled Asset Relief Program (TARP), which essentially took a massive chunk of private debt and made it public. This crisis caused lending to become tight and more restricted. In 2008, the epicenter was in a single country, the U.S, but its impact spread rapidly.

In contrast, the crisis of 2011 had its roots in the sovereign debt loads of several countries of the 17-member Eurozone, and it moved slowly globally. If 2008 was like being water-boarded, the crisis of 2011 was Chinese water torture. The crisis of 2011 was complicated by the politics of debt and deficits. Even though debt levels were problematic three years prior, they had not yet become highly politicized. That all changed with the European debt crisis. 

Global Economic Governance After the Crisis

Meanwhile, as a result of the Global Financial Crisis, management of the global economy was broadened from a core of developed Western countries to a broader Group of 20, or G-20, comprised of the world’s 20 largest economies. In a series of global summits over the course of the years following the crisis, the G-20 managed to adopt measures that avoided the worst-case scenarios of protectionist trade wars that can easily follow a global downturn. But over time, the G-20’s crisis management record was more harshly criticized. What is the real verdict, and what does it say about future cooperative management of the global economy? 

China’s Challenge to the Global Financial System

In the years since the Global Financial Crisis, China surpassed the United States as the world’s top trading nation, and in 2014, it also surpassed the U.S. to become the world’s largest economy in purchasing-power terms. As that happened, concern began to grow about whether China would use its rising economic power and influence to boost or challenge the existing global economic order. While China is without any doubt an economic titan, its impressive rise had not been accompanied by a vision to reshape the global economic order. Instead, rather than accepting the status quo as given, Beijing has worked to revise foundational elements of the U.S.-led economic order.

Reforms to the International Order Didn’t Survive the Global Financial Crisis

With the Global Financial Crisis now safely in the past, the sense of urgency that drove the initial reactions to it have subsided. Policymakers in virtually every major country have pivoted away from discussions of international cooperation and institutions to focus on domestic issues. The Trump administration is merely the most pronounced example of this trend with its “America First” focus. The financial crisis made leaders realize that they had to work together globally to defend their interests. In the age of Trump, their successors are far more interested in satisfying populists at home than their counterparts in the G-20. 

You can learn all about the global financial crisis’s impact and legacy and a wide variety of other global issues in the vast, searchable library of World Politics Review (WPR): 

What distinguished the 2008 U.S. financial crisis from the European debt crisis, in The Financial Crisis of 2011: Why This Time is Different. 

The G-20’s record in response to the global financial crisis, in G-Hero or G-Zero: Global Economic Governance After the Crisis 

How the crisis shifted economic power and influence to non-Western economies, in The Global South and Financial Governance 

Whether China’s rise represents a boost or a challenge to the global economic order, in New Order: China’s Challenge to the Global Financial System 

Why international cooperation frayed once the crisis subsided, in Why Reforms to the International Order Didn’t Survive the Global Financial Crisis 

But this is just a fraction of what you’ll get in WPR’s searchable library of content, where you’ll find over 9,000 articles on topics such as international diplomacy, the global refugee crisis, global finance, economic trends, gender equality, water rights, and so much more!

And the World Politics Review Library is searchable by author, region, and issue, so you can find specific topics quickly and easily!

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