Lawrence Person's BattleSwarm Blog

Let’s talk about the European Debt Crisis.

[The sound you hear is the countless multitudes clicking off to another blog.]

Way back last decade, dispatches on the ongoing crisis were a regular staple of the blog. To summarize the crisis for those who weren’t paying attention back then:

A bunch of countries joined the Eurozone without following the requirements outlined for membership, including limiting budget deficits to 3% of less of their GDP, and overall debt-to-GDP ratio of 60% or less. How were they able to join? Simple: They lied and the Eurocrats turned a blind eye, because EU.

Foremost among those running into trouble were the PIIGS (Portugal, Italy, Ireland, Greece and Spain). (Cyprus and Malta also had serious issues, but their tiny size meant they presented no systematic risk for other nations, and Cyprus relieved its problems by becoming the dirty Russian money laundering capital of Europe.)

Ireland was probably the most incongruous of the five, since their debt only spiked when the Irish government nationalized Anglo Irish Bank to prevent it from collapsing.

In all other cases, the cause of of the problem was obvious: Each ran huge budget deficits to underwrite generous welfare state programs for countries with below replacement birth rates, and they were allowed to get away with it for a while because they used Germany’s credit rating in lieu of their own thanks to the Euro.

The problem finally came to a head after the SubPrime Meltdown in 2008 made various banks and regulatory agencies actually scrutinize balance sheets and realize just how broke the PIIGS were.

Greece was the worst, being the most dysfunctional, and absolutely refusing to slow down spending on their own. There followed a reoccurring farce where various Euro regulatory agencies (including the International Monetary Fund, the European Commission, and the European Central Bank, collectively known as “the Troika”) demanded Greece end their ridiculous high levels of deficit spending, Greece refused, the Troika threatened to cut off the tap entirely, Greece promised to be better, the Troika reluctantly extended them another loan, and then Greece continued to spend recklessly, setting up the next round of the farce.

A bunch of Eurozone countries then implemented “austerity,” which involved not cutting spending to balance their budgets, but merely reducing the deficits slightly.

None of these “austerity” measures eliminated deficit spending, and none addressed the issue that’s driving all of Europe (and us) bankrupt, namely unwillingness to carry out structural reforms of the welfare state. The few tiny reforms that have been undertaken have been, as NRO’s Michael Tanner notes, ridiculously timid, and even those have been heavily weighted in future years. “So far, European governments haven’t even been willing to take a penknife to the welfare state, let alone an axe.” Plus a huge round of tax hikes…

Actual austerity would mean (at a minimum) reducing spending to the amount of money actually taken in. As best I can tell, none of the PIIGS, or France, or the UK has undertaken such real austerity. That “severe” Greek austerity that just caused a change in government? It reduced Greece’s official deficit spending from 9.0% of GDP to 7.5% of GDP. They didn’t even want Greece to stop digging a hole, they just wanted them to dig more slowly.

Austerity did not fail, it was declared difficult and left untried.

Eventually growth in the Eurozone picked up just enough, and the Troika managed to install enough of their own functionaries in various PIIGS positions to ensure that their half-assed, anemic austerity programs were actually followed that, along with Brexit and the Rise of Trump, it got Eurozone debt crisis off the front page and back under the rug.

So fast forward to today. Has the European debt crisis been solved?

Hah! Of course not. Does the EU ever really solve anything? European debt grew during the pandemic, but this time they get to blame Flu Manchu rather than slow growth, high taxes, declining births and a bloated welfare state.

Spain, Italy and Greece have all continued their PIIGS-ish ways. The UK, under ostensibly conservative Tory governments for the entire pandemic and constant attack for “austerity,” and they’re still piling up debt like one of the PIIGS, though the double-whammy of Brexit dislocations and idiotic lockdowns are more to blame than increased spending per se.

Ireland, with the lowest deficit for the period, seems to have proved that their membership among the PIIGS was transitory.

What then of Portugal? Have they improved? It turns out only slightly and relatively. Their debt increased by 13.9% for the period, making them better not only than Spain, Italy, Greece and the UK, but also France, Cyprus, Malta, Hungary and Slovenia. They evidently managed a balanced budget in 2019 (at least on paper). Their Flu Manchu deficit spending is still unsustainable, just slightly less unsustainable than many of their fellow Eurozone grave-diggers.

Ireland seems to have escaped PIIGSdom, but the others as are still very much in trouble, with debt-to-GDP rations at or above 100%:

Greece: 174.15%

Italy: 133.43%

Portugal: 119.46%

Spain: 95.96%

Ireland is down at 62.42%.

We don’t have much standing to condemn others, as the United States ratio stands at 106.70%. Donald Trump had numerous virtues as President, but he was no deficit hawk, and Biden would crank up deficits even higher if the Senate let him.

We can see the fruits of this orgy of deficit spending in the worldwide inflation we’re seeing. (Feel free to argue whether government budget deficits or central bank quantitative easing is more at fault.) Inflation may ruin nations, but it’s the deficit-spender’s friend, letting him pay off debt on the cheap with now devalued currency. And it’s the working poor whose lives are most impoverished by it.

Robbing Peter to pay Paul has always been a popular proposition to get Paul’s vote, but we’re now robbing Peter and Paul’s unborn grandchildren to delay financial reckonings until after the next election cycle.

It will not end well.

Tags: austerity, Brexit, Budget, coronavirus, Economics, EU, Europe, European Central Bank, European Debt Crisis, Eurozone, Foreign Policy, Germany, Greece, IMF, Ireland, Italy, PIIGS, Portugal, Spain, UK, Welfare State

This entry was posted on Sunday, February 6th, 2022 at 2:20 PM and is filed under Budget, Economics, Foreign Policy, Welfare State. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.