Did Austerity Fuel Asset Bubbles in the Eurozone and U.K.?

Austerity and the Shift to Monetary Policy

After 2008, the Eurozone and U.K. pursued austerity, cutting public spending and raising taxes. However, central banks took the lead in stabilising economies. The Bank of England (BoE) and European Central Bank (ECB) introduced ultra-low interest rates and quantitative easing (QE) to prevent deeper recessions.

  • BoE slashed rates from 5% (April, 2008) to 0.5% (March, 2009), the steepest rate reduction in its history (BoE, 2023).
  • The ECB cut its Main Refinancing Operations rate from 4.25% (July, 2008) to 1.00% (May, 2009), before gradually reducing it to 0.00% in March 2016 (ECB, 2023).
  • The ECB's consolidated balance sheet expanded from approximately €2.1 trillion at the end of 2008 to €3.5 trillion by the end of 2016, reflecting the scale of intervention required to counteract weak demand. (ECB, 2008; ECB 2016)

These measures prevented immediate financial collapse and stabilised sovereign debt markets. However, they also created long-term risks, particularly in housing and financial markets.

Did Austerity Fuel Asset Bubbles?

With limited public spending, central bank liquidity flowed into financial assets rather than the real economy:
  • U.K. house prices increasing from £156,512 in 2009 to £203,771 in 2016, a 30% increase, driven by cheap mortgage credit and supply constraints (Nationwide, 2025).


U.K. House Prices (£) (2006-2016)
  • Stock markets surging, as investors sought returns in equities and bonds detached from underlying fundamentals. Research highlights that QE and low interest rates sustained the demand for financial assets rather than boosting productive investment, inflating asset prices (Deleidi & Mazzucato, 2018). Although, this effect was mainly seen in the U.S. with further stimulus.

EURO STOXX 50 (€) (1986-2025)

  • Cheap credit conditions led to an increase in nonfinancial corporate debt from 78% to 92% of global GDP between 2008 and 2018 (World Bank Group, 2020), often to sustain operations, refinance obligations, or engage in financial engineering, raising concerns over financial stability and economic growth.

In the Eurozone, ultra-low interest rates and ECB asset purchases suppressed bond yields, allowing indebted countries to borrow cheaply while distorting financial markets.

While austerity controlled public deficits, it transferred risks to private markets, leaving the Eurozone and U.K. vulnerable to future financial shocks.

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