The omissions and errors of the past will not be eliminated with a stroke of the pen. Debt, living beyond one’s means, managing one’s finances unsustainably – this is a phenomenon for nearly all Western countries and for us Europeans in particular. Leaving it behind will entail a long journey and will require much determination. – Chancellor Angela Merkel in her farewell speech to European Central Bank President Jean-Claude Trichet
This is pretty much the unchallenged conventional wisdom on Europe today. Even if one is critical of austerity or thinks the recession and unemployment is heartless, there’s sort of a feeling that Merkel’s assertion is still basically true. Hence why even President François Hollande, however a well-thinking Socialist he might be, looks to be ready to accept the balanced budget treaty basically unchanged.
How true is the idea though? The stats tell a rather different story.
1. The eurozone has less debt than other major developed economies
This is aimed at the “us Europeans in particular” part of Ms. Merkel’s statement. It also highlights the fact that if there is a “debt crisis” it is not simply because of the amount of debt, but because the eurozone system as currently designed cannot cope with it (as such it is indeed a “euro crisis”). The U.K., U.S.A. and Japan are not suffering from similar crises, largely because, unlike the eurozone, they have pooled debt and this debt can be financed by their central banks.
2. European citizens are savers
This is especially true of eurozone countries.
3. European debt decreased between 1997 and 2007
Aggregate public debt as a proportion of GDP in the European Union decreased from 69.9% in 1996 to 59% in 2007. Most European states were fairly fiscally responsible, but their gains were annihilated following the financial crisis: GDP shrank, revenue fell, deficits increased to ensure minimal economic activity, and private debts were taken on by the taxpayer.
The decline in debt was not necessarily an abberation. In the first half of last year, before the powers that be jinxed the recovery, eurozone debt-to-GDP was once again decreasing.
4. Eurozone countries had surpluses between 1992 and 2008 (excluding interest payments)
Source: European Economic Forecast Spring 2012 p. 170
The “primary balance” refers to how much a government earns, minus what it spends, not including interest payments on existing debt. In aggregate, the eurozone has earned more than it spent, except in order to service these interest costs. To the extent the eurozone as a whole was more indebted it was because of servicing previous debts…
5. Europeans’ long-term fiscal outlook is pretty good
How much consolidation is needed?: Immediate rise in the underlying primary balance needed to bring debt to 50% of GDP in 2050 (OECD)
On the same theme, the OECD has an interesting post looking at how much countries’ budgets need to be balanced to achieve 50% debt-to-GDP in 2050. Note that Italy, Portugal, Greece and Hungary are among those countries nearest to balance while Japan, the U.S.A. and the U.K. are stuck at the far right… You might think that doesn’t make sense. It means many European countries have made extraordinary efforts to balance their budgets (many have achieved primary surpluses) but they are now in self-reinforcing crises because unsustainably high refinancing costs. For example,the European Commission has reported that last year almost 5% of Italian GDP went to interest payments (p. 80), despite the country’s primary surplus, and similarly catastrophic situations exist elsewhere.
Whatever your opinion on the EU and the way out of the crisis, one thing is clear: Europeans are among the more fiscally responsible peoples in the world and often are indeed “living within their means.” If Europe is in crisis, it is largely because of these massive interest payments on existing debt, which is in turn largely due to the dysfunctional rules of the eurozone. How we rectify this – whether through pooled EU debt, direct financing by the ECB, or serial defaults – is less clear.