Spain Did Not Run Up High Public Debt

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Thursday, 29 December 2011 05:43

In an article discussing the current budget situation in Italy the NYT told readers:

"Germany has adamantly opposed what it sees as rewarding the bad behavior of southern rim countries like Italy, Greece, Spain and Portugal, which amassed high public debts and where tax evasion is rampant."

Actually, of this group only Greece was consistently experiencing a rise in its debt to GDP ratio. In Portugal there was some increase in the debt to GDP ratio in the years prior to the recession, but Italy's debt to GDP ratio actually had been trending downward since 2000. Spain was running budget surpluses and had a considerably lower debt to GDP ratio than Germany.

The article also asserts that the market is forcing Italy to reform its budget. This is somewhat misleading since the European Central Bank (ECB) has played a major role in creating current market conditions. The ECB has been considerably less expansionary than the Fed during the downturn, even raising interest rates last spring, ostensibly to fight inflation. In addition to pushing up interest rates on government debt, the ECB's policy has reduced growth and employment, worsening the budget situation of euro zone countries.