The Myth of Profligate Euro Zone Countries

Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse.

Perhaps repeating this line three times will help the type of people who have columns in the Washington Post on the euro zone crisis get some understanding of the issue. Today we get a lecture on southern country profligacy from Daniel M. Price. Yesterday, Post columnist Matt Miller told us how he misleads his daughter about the nature of the euro zone crisis and suggested that the rest of us be equally misleading with our own children.

The reality is that most of the countries currently facing debt troubles were not profligate prior to the crisis. While it may be reasonable to describe Greece as being profligate, the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years leading up to the crisis.

Italy, the closest Greece competitor among euro zone crisis countries, had relatively small budget deficits in the years before the crisis. Its debt to GDP ratio fell from 93.7 percent of GDP in 2001 to 87.3 percent of GDP in 2007. In other words, the deficits of these years were completely sustainable.

Spain ran budget surpluses in the years from 2005-2007. Its debt to GDP ratio fell from 50.3 percent in 2000 to 26.5 percent of GDP in 2007. There is no remotely plausibly story of government profligacy here.

In short, people who describe the euro zone crisis as a story of excessive government deficits are pushing an ideological agenda that has nothing to do with reality. The story of the current deficits of the non-Greece countries is the story of the collapse of housing bubbles that threw the euro zone economies into a severe downturn. The European Central Bank (ECB) has magnified the problem by maintaining relatively tight monetary policy in order to maintain very low inflation and also explicitly asserting that it would not act as a lender of last resort to the heavily indebted countries.

Blaming government profligacy may be useful to those who want to see cuts in social spending, but it is not a story that is based in reality. It conceals the incompetence/greed of the private sector bankers who fueled the bubble. It also ignores the recklessness of the ECB of clinging to its inflation obsession even in the midst of a crisis that threatens the survival of the euro and could cause millions of additional workers to lose their job.

Sermon on the (a)mount...
written by diesel, December 01, 2011 6:22

Describing "the euro zone crisis as a story of excessive government deficits" may be "pushing an ideological agenda that has nothing to do with reality" and "Blaming government profligacy" may not be a "story that is based in reality" but these stories certainly resonate with a sector of the American public. Perusal of the comments sections of various news media sources shows this to be a popular stance.

Why is this? Why do some people prefer a "story" to the truth? Perhaps because the "lecture" we got today "on southern country profligacy from Daniel M. Price" is actually a sermon. And sermons stimulate unconscious memories of our early pre-rational religious training. And being able to blame someone weaker offers a satisfying measure of closure. Problem solved. The fault lies in the behavior of these weaklings who were guilty of a moral failure due no doubt to their having come under the seductive influence of an evil agent who promised them easy gratification while withholding from them the true cost of their indulgence, which is hard work.

This is accompanied by a certain moral smugness which says "But I am innocent of this failure. I am beloved in the eyes of God. I am righteous and therefore rewarded with His Blessings. I am not the agent of His Judgement, just the Messenger. He shall judge and punish. In carrying out Austerity, I act only as the intermediary. I am transparent, blameless. Accept His Judgement for He is a forgiving God. Bow down your stiff neck. Return prodigal Son, to the Father."

Religious tales (of this kind anyway) and scientific evidence still don't get along.

Diesel
written by EMichael, December 01, 2011 10:51

Just perfect.

Reply to Diesel
written by Steve Lightner, December 01, 2011 10:57

Diesel hits it right on the head. Melissa Harris-Perry made a similar observation on Up/Chris Hayes where she called it the "Just World Theory" (just and omnipotent God) (http://www.onthecontrary.us/20...-unveiled/). Blaming the victim is just a way to create a false sense of safety in a chaotic world. It is not that they are lying to us, it is just that their world view filters out everything that is counter to their beliefs.

Surpluses? Yes. Good financial judgement? No.
written by Anthony, December 01, 2011 11:18

Dean-

I find puzzling your suggestion--repeated here and elsewhere--that Spain's government was fiscally responsible prior to the collapse of its housing bubble (in the past, you have made similar comments about Ireland, calling it "a model of fiscal probity" and "a model of fiscal responsibility" prior to 2008).

It seems to odd to me to commend eurozone governments for running budget surpluses during the pre-crash years. Clearly, the budget surpluses were a mirage--based, as they were, on tax revenues from the property bubbles which their respective governments helped inflate.

The budget surpluses were not the result of fiscal prudence; rather, they were the warning signs that the economies of these eurozone countries had become badly distorted by obviously unsustainable property bubbles.

I agree that misrepresenting the finances of these countries in order to push for the dismantling of the welfare state is irresponsible and wrong, but we shouldn't over-correct and defend the judgement of the governments that drove their countries into economic ruin.

...
written by liberal, December 01, 2011 12:19

Anthony wrote,

I agree that misrepresenting the finances of these countries in order to push for the dismantling of the welfare state is irresponsible and wrong, but we shouldn't over-correct and defend the judgement of the governments that drove their countries into economic ruin.

I don't think Dean is defending e.g. the Spanish government that broadly. He's merely defending it against the insituation that on a purely fiscal dimension, it was imprudent.

@liberal
written by Anthony, December 01, 2011 1:17

I don't think Dean's remarks are that narrow. But it just seems to me that he ends up championing the fiscal judgement of countries that profited--in budgetary terms--from massive unchecked property bubbles. Yes, in a strictly accounting sense, both Spain and Ireland were in the plus column, but only because they were in the process of feeding off the fake wealth created by rising house prices. Take away the bubble-generated revenue, and both countries were in the red.

I just think defending their governments on this point is not much to hang your hat on.

@ Steve Lightner
written by diesel, December 01, 2011 1:46

Nice link. She is dead right in her observation about the similarity between "free-market" Republicans and the self-satisfied "Christians" (who are so certain of their acceptance in the eyes of God) when she says, "if you are a loser, you deserve to be one, and to help you or interfere in the market place would be to violate the natural order of justice, totally justifying my lack of empathy and selfishness."

it's not about spending
written by alexander, December 01, 2011 1:55

By looking at budgets (even in the case of "profligate" Greece), we miss the entire story. According to OECD data, in 2000 Greece's debt % of GDP was about 109 and actually went down to a little less than 106 by 2007. Of course, then came the crisis (110% in 2008) and not only until the troika gets involved does the ratio start to explode.

While I wouldn't say that this is the sole fact but, what the periphery countries actually had in common was large capital inflows, which of course slow down or reverse as part of the crisis. And with a common currency, if this flight stay within the EZ, there's no devaluation associated with the outflow.

@Anthony
written by Peter K., December 01, 2011 2:03

The GIIPS "original sin" is that gave up their currencies for one managed by the tight-fisted ECB. That and an absence of European fiscal integration is why they're having budget problems, not because of the boom. Their problem isn't the boom masking budget problems, it's the budget problems caused by an unnecessary recession caused by the ECB raising rates in April b/c of inflation paranoia.

There's also the contagion effect from Greece on the others.

I see what you're saying, it's sort of like Clinton and the Internet bubble or China avoiding the 1997 East Asian financial crisis via capital controls but there are many other issues.

To blame the Spanish government for not staving off the boom or for "masking its budget problems" is having some awfully high standards for government behavior. It's almost argumentative.

@Peter K.
written by Anthony, December 01, 2011 4:19

Let's be clear: the eurozone countries of Spain and Ireland did not experience "booms"; they supported and encouraged asset bubbles which created fake wealth--but real tax revenues--and unproductive and ultimately dangerous economic activity; i.e., overbuilding. Ireland did experience an honest-to-goodness boom from the mid-1990s to about 2001, but that merely allowed them to (almost) catch up to the most basic standard of living already experienced by the other big EU countries. What followed was ugly property speculation and a destructive waste of resources.

Yes, the ECB bears equal responsibility for allowing eurozone housing bubbles to expand to dangerous levels. But the ECB and the member governments are not ignorant folk; they know a bubble when they see one. They just usually call it a "boom," and then everyone feels better.

And, despite what you say, staving off asset bubbles is one of the most basic things central banks and governments can do to maintain fiscal health. However--and to extend Dean's point a little--they were likely misled, and dazzled by, their budget surpluses, which looked impressive on paper. Which, in reality, is the only place they existed.

-1

Speculative Borrowing is Inherently Imprudent
written by Wisdom Seeker, December 01, 2011 4:55

I think Dean totally misses the point. Nations vulnerable to major economic shocks needed to be far more prudent than they have been.

Running a surplus during a boom can STILL be "profligate", if one cannot survive the inevitable bust. Especially if promises are made which are not sustainable without future deficit spending (e.g. public worker pensions which assume boom-time rates of growth).

However, I agree that the current trend of picking on southern Europe is unfair. By and large, the people of many many nations have borrowed too much, and not invested the loans wisely enough. It's not just southern Europe who will be unable to repay their debts at present value.

The U.S. also ran budget surpluses in the late 1990s... but we, too, are today profligate borrowers, with debt/GDP hitting 100% this month, debt/tax revenue well over 500%, and with debt growing at 10%/year.

Much of the hype about Europe can be seen as deliberate, politically motivated misdirection, to distract investors from the greater debt/GDP of the USA, Britain and Japan.

On the whole, the major governments of the world cannot pay back what they owe, without refinancing (or rolling over) debt coming due. That is clearly defined as "speculative" finance by students of economic history (time to reread Kindleberger's "Manias, Panics and Crashes"!). Speculative, as in "you are in deep trouble if the market doesn't go your way".

The result of excessive, speculative borrowing is that today most large nations are at the mercy of those who control the interest rates.

The need to be prudent is highlighted in a period of declining interest rates (as we had for the past 30 years), because when the rates stop falling, even if one can refinance, one can no longer wiggle out of the interest burden by taking advantage of lower rates.

...
written by Calgacus, December 02, 2011 5:03

Anthony's comments miss the point. All of the Eurozone states are insanely austere - "fiscally irresponsible" by the standards of independent states. Which they are NOT. All the Eurozone states are insanely profligate by the standard of US states, of slaves of the ECB, which they ARE. If the innumerate ECB continues on its present course, there is not a chance of a snowball in hell that Germany, GERMANY will not default on its debt.

What was fiscally irresponsible was signing on to the suicide pact called the Euro in the first place. Anything after that is utterly trivial. The problem is not any state's economic policy, but the Euro itself, and the Eurocrats, the ECB, the most corrupt, ignorant & stupid people on the planet.

Non cosi veloce compare
written by Robert Waldmann, December 02, 2011 7:43

that is not so fast pardner in Italian.

As far as I know, the Italian housing bubble hasn't burst yet. I am sitting in an Italian house and attempting to buy an apartment in Rome. The prices are as high as ever.

The case of Italy is different from those of Spain and Ireland just as those cases are different from Greece.

I didn't predict the current Italian crisis. It clearly has a lot to do with the level of debt (run up in the 70s and 80s). This means that, even if we residents of Italy have nothing to fear but fear itself, we should be very frightened. If investors trust the Italian Treasury, it can pay. If not it can't. There can be a rational speculative attack on Italian Treasuries, even though the big bunga bunga buffoon ran low deficits.

I'm not saying the current panic is rational. The fact is that for most Europeans (including almost all Italians) the Italian government is profligate by definition no matter how much it collects in taxes (a whole lot) or how little it spends (OK also a lot).

Also the bombastic bathetic bunga bunga boss didn't reassure anyone.

There was some reason to hope that, as his economy minister said, Berlusconi personally was the problem. Sad to say, the very sober Mario Monti has to pay through the nose too.

regional fiscal situation
written by marc, December 03, 2011 6:16

Isn't there something to say about the way the Spanish central government's fiscal situation related to the regional governments in Spain? As I understand it much of the fiscal fragility in Spain was shifted to the regions, helping the central numbers to look even better.

The Myth of Profligate Euro Zone Countries

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