European leaders are meeting in Brussels this week in yet another attempt to craft a plan that would deal with their ongoing fiscal crisis and preserve the Euro. The International Monetary Fund will likely play a role in a fiscal rescue plan, with Reuters reporting today that “Euro zone leaders will likely agree to boost the International Monetary Fund’s lending capacity with 150 billion euros.”
The involvement of the IMF has, like always, gotten Republicans in the U.S. Congress all bent out of shape, since the U.S. is an IMF contributor. According to the Republicans, the IMF lending money to European nations would be indirectly approving of those nations’ fiscal choices.
“Europe is going to default eventually, so why would you socialize their profligate spending?” asked Sen. Tom Coburn (R-OK). “The reason we’re in the situation we’re in [is] because of excessive debt in the industrialized world,” agreed Sen. Orrin Hatch (R-UT).
A lot of mythology has been built up regarding why Europe is in the shape it’s in, but this theory leads the pack — Europe is collapsing because its governments were out-of-control spenders. However, there’s one problem with the theory. As Martin Wolf noted in the Financial Times, the claim that Europe’s most troubled nations spent their way into a crisis is simply not true:
Take a look at the average fiscal deficits of 12 significant (or at least revealing) eurozone members from 1999 to 2007, inclusive. Every country, except Greece, fell below the famous 3 per cent of gross domestic product limit. Focusing on this criterion would have missed all today’s crisis-hit members, except Greece. Moreover, the four worst exemplars, after Greece, were Italy and then France, Germany and Austria. Meanwhile, Ireland, Estonia, Spain and Belgium had good performances over these years. After the crisis, the picture changed, with huge (and unexpected) deteriorations in the fiscal positions of Ireland, Portugal and Spain (though not Italy). In all, however, fiscal deficits were useless as indicators of looming crises.
Now consider public debt. Relying on that criterion would have picked up Greece, Italy, Belgium and Portugal. But Estonia, Ireland and Spain had vastly better public debt positions than Germany. Indeed, on the basis of its deficit and debt performance, pre-crisis Germany even looked vulnerable. Again, after the crisis, the picture transformed swiftly. Ireland’s story is amazing: in just five years it will suffer a 93 percentage point jump in the ratio of its net public debt to GDP.
These charts show that, according to deficits and debt, countries like Spain and Ireland were acting much more responsibly than Germany and France — therefore it can’t have been deficits and debt that caused their problems. As The American Prospect’s Harold Myerson put it, “some of Europe’s current basket cases were actually running budget surpluses in the years before the Lehman meltdown. Ireland and Spain weren’t overspending at all — but the banks and investors speculating on their housing markets most certainly were.” What Europe needed was better regulation of its financial sector and a central bank willing to take the steps necessary to lessen the pain of the Great Recession, neither of which it had.
Republicans like to claim that if the United States doesn’t slash its budget to the bone, then it will wind up like Europe, careening towards a crisis. But it’s simply a myth that it was spending that got Europe into trouble — and austerity is certainly not going to save it.