Wednesday, 7 December 2011

Who is to blame for the Euro Crisis? (1)

The Eurozone is a very worrying place. And it doesn't look like it's improving.

On the one hand there is now political will to make improvements to treat the problems of governments who have borrowed more than the market currently thinks they should have. The narrative we're being fed is that certain governments were profligate, they bought the votes of the people and ran up huge debts that are now unsustainable. The market is simply doing it's job by raising interest rates to point this out and we (including the Greeks) should be grateful for this service.

But looking at the situation rigorously none of this seems to be fact. To start with, lets look at debt over the last few decades: (taken from the IMF's historical Debt Database)

So the question is: in this time frame were governments over spending and being profligate? First off it's obvious that all countries saw huge rises in debt after the 2007 crisis, not surprising it was the biggest recession since the great Depression. But the charge levelled at Governments isn't that they did to much after the crisis it's that they were fundamentally lax in their budgets for a longer period.

How can that possibly be the case? From the peak of debts in the early 90's Only Greece, Portugal, FRANCE and GERMANY saw rises in Debt to GDP!

For Greece it is clear that something was very wrong, I'd still disagree on how they're trying to fix it but something had to give. The same is true to some extent of Portugal but Spain and Italy were both running down structural deficits (the difference between income and spending that left over when you take away the business cycle). The idea of Mercozy lecturing these guys on fiscal discipline seems some what laughable.

Moreover, once again we see that the current fiscal crisis is almost wholly caused by the financial crisis. Even better it exposes Camerons lies. Look at the Uk line. From 1997 to 2007 it is downward sloping. The state of the public finances in Britain is nothing to do with Labours over spending and everything to do with the greed of bankers. Yet Cameron has promised to do everything in his power to protect their interests at the summit today. Go figure.