It is, in many ways, absolutely amazing how Europe’s watchdogs and central monetary figureheads have almost stood by while the sovereign debt crisis first snowballed. It was almost as if the European Central Bank was a reluctant bystander, unwilling to shoulder the responsibility and burden of some of the member states of the European zone. Greece, to quote a prime example, flouted several rules about fiscal well-being while a member of the Euro Zone and when their chicanery came to light (only because the government changed hands and the new one wasn’t willing to be left holding the baby) there was of course shock and outrage over what had happened but other than a bit of rhetoric no real action was taken against the Greeks. The European Central Bank needs to take a more active role and clamp down on errant member states, but there is no indication yet that exactly that will end up happening.

Understanding the European debt crisis can doubtlessly be a tricky thing, but the key to understanding exactly where things went wrong lies in making a note of several macroeconomic movements that unfolded in this region over the course of a decade. European countries that lay in southern regions, and you can add Ireland into this mix even though it doesn’t, went through a phase of experiencing bubbles in their real estate markets. In contrast, European countries that lay in Northern regions experienced caterpillar-like economic growth, Germany perhaps being an exception on account of strong export demand. And so when the economy started to fall to pieces (thanks to the boom-and-bust cycle), the government had to be there to cushion the fall as best as they could, and this led to a swelling in the budget deficit and debt levels of each country in turn.

So just how exactly did these macroeconomic roads diverge? Many experts and pundits have chatted about this issue, a burning one, and stated that the foundations of this entire boom-and-bust cycle that could be seen in nations such as Greece, Spain and Ireland lay in contracting interest rates and the use of the Euro as a single currency. These two factors alone saw a spurt in consumption and consumerism and led to the creation of a bubble in the real estate market. Of course, this is not a blanket explanation that can be retrofitted to everything; in Italy too interest rates declined after the introduction of the Euro, but it did not experience a boom or bust of any sort. Perhaps then this crisis can be attributed to waves of optimism and pessimism and the way that they can drive on economies, a phenomenon referred to animal spirits. This is nothing more than spontaneous motivation that is self-fulfilling.

The Euro zone itself is far from integrated. A few years back, Germany was in the throes of pessimism while Spain, Greece and Ireland were brimming with optimism. To say the shoe is on the other foot now would be an understatement of the highest order. The German recovery has been fuelled by a wave of optimism and the sentiment of pessimism has now shifted down south. Thus there is no sense of integration when it comes to these animal spirits and it has created a sense of a single entity pulling in different directions when it comes to competitiveness. Waves of optimism manifested itself in wage and price increases but the diverse states of economic mindsets meant that prices and wages were not uniform throughout the region. Surely governments have budgetary tools that they can deploy as an anti-cyclical instrument even if these tools are hamstrung by the decision-making processes that underlie these policies.

Can the European Central Bank be of assistance for national governments? It has been said that the ECB can’t be held responsible for the state of national economies since its over-arcing responsibility is that of the maintenance of price stability above everything else, but this is too easy an answer to offer. Price stability is indeed one of the ECB’s objectives, but that is over and above another objective, namely financial stability. In the light of the debt crisis, it is critical that the ECB looks not only at the whole, but also individual nations too. An avoidance of the debt crisis can be best brought out not only by shaping up national governments for better performance, but also focusing on bettering the functioning of figureheads such as the European Central Bank.