More often than not in political and economic debates, “truths are illusions about which one has forgotten that is what they are”. Unsurprisingly, Nietzsche’s statement holds true in many discussions about the financial and fiscal crisis that swept the Old Continent between 2008 and 2012.
In the wake of the Greek fiscal crisis and the collapse of the banking systems in Ireland, Italy, Spain and Portugal, many commentators have argued that the “periphery countries” were hit by a fiscal crisis because of past budget mismanagement. According to a 2010 Forbes article, “Ireland, Portugal, Greece and to a lesser extent Spain dramatize Europe’s struggles with the long-term debt politicians have amassed. The cause is fundamental fiscal incompetence, aggravated–not caused–by the collapse of growth (and associated revenues) in the global recession.”
This argument is not entirely without merit. Let’s consider Greece: this interactive graph, extracted from the Bertelsmann Stiftung’s new GED LAB, shows that despite extremely low long-term government bond yields and sustained economic growth, the Greek government exhibited a deficit equal to 5 percent of its GDP in 2005.
However, if we compare these exact same indicators to other periphery countries – here Spain – we see little evidence of fiscal mismanagement. The Spanish government not only had budget surpluses prior to the financial crisis, but it also displayed a rapidly shrinking national debt. Benefiting from low borrowing costs and steady growth, Spain smacked into the crisis in a rather healthy financial situation – even compared to other so-called “virtuous” European countries.
So was there an overall trend for the periphery countries? The following graph compares the Irish, Italian, Spanish, Greek and Portuguese national debt (as a percent of GDP) to Germany’s. At first glance, Italy appears to be among the sinners – along with Greece. But despite a fairly high national debt as a percent of GDP, Italy had a shrinking debt to GDP ratio while Germany’s ratio kept rising. Portugal, on the other hand, had a rising debt to GDP ratio, but it remained equal to Germany’s before the crisis. Ireland had a demonstrably healthy financial situation.
All in all, a quick data overview makes it hard to accuse anyone beyond Greece of “fundamental fiscal incompetence”. Quite obviously, the debt to GDP ratio soared following the series of bank failures after 2008, as economic stabilizers plunged and bailout bills exploded for the periphery nations.
If placing national mismanagement at the heart of the EU crisis is thus not a convincing economic argument, it is also perhaps politically unwise. In a 2011 article, All Souls fellow and economics professor Kevin O’Rourke argued that: “By confusing fiscal and banking crises in the public mind, the ECB is also fuelling anti-EU sentiment in the core, since core taxpayers understandably resent the notion that they should subsidize feckless peripheral taxpayers. By contrast, greater honesty about the fact that we have a Europe-wide banking crisis would make taxpayers everywhere realize that they have common interests, and a common enemy, namely an out-of-control financial sector.”