Government Spending Alone Did Not Cause the Euro Crisis

Conservatives are wrong to place all the blame on government spending.

The contemporary rhetoric used by many conservatives when they are discussing Europe goes something like this: The Europeans spent too much, too quickly under the guidance of an over-centralized super-state and as a result are facing economic apocalypse; their future is ours if we don't shrink government and cut spending. While I am all for shrinking government and cutting spending, the rhetoric being used by most American conservatives when they speak about the euro-crisis is misleading, intellectually dishonest, and lazy.

Mitt Romney offered such an account of the situation in Spain during the first presidential debate, where he said,

I—look, the revenue I get is by more people working, getting higher pay, paying more taxes. That's how we get growth and how we balance the budget. But the idea of taxing people more, putting more people out of work—you'll never get there. You never balance the budget by raising taxes.

Spain—Spain spends 42 percent of their total economy on government. We're now spending 42 percent of our economy on government.

I don't want to go down the path to Spain.

These comments were understandably not well received in Spain, where at least one columnist pointed out that the U.S. has had similar spending-as-a-percentage-of-GDP to Spain's for some time.

Obviously it's tempting for American conservatives, in an election that revolves around the economy, to use the European crisis as some sort of crystal ball. But there's more to the crisis than spending, which is why the economic crisis affecting the euro—a currency used by 17 countries with 17 different fiscal policies, cultures, and histories—is hard to summarize in pithy sound bites.

Saying that excessive spending will lead to the sort of situation being seen in Europe might be an effective way to convince Americans that we should embrace smaller government. However, the rhetoric does not match this "Europe is spending gone crazy" rhetoric. 

Some facts.

Excessive spending as the main reason for current economic misery can only be attributed to one of the five Euro Zone nations: Greece. Greece joined the euro at the beginning of 2001 after failing to join in 1999 because it did not meet the required economic criteria for membership.

In 2001 Greek debt to GDP was almost 104 percent. At the same time, most of the other Euro Zone nations had much lower debt to GDP. Ireland's debt to GDP was 35.1 percent, Portugal's was 53.5 percent, and Spain's was 55.6 percent. In fact, in 2001, Germany's debt to GDP was higher, at 59.1 percent, than the debt to GDP rates of Ireland, Portugal, and Spain. Italy is the exception; it was enjoying a debt to GDP rate of 108.2 percent in 2001. However, unlike Greece, Italy's debt to GDP has stayed comparatively stable. So, it is far too simplistic to say that excessive spending is what has led to a crisis in "Europe." Were spending alone to be blamed then more of the "northern" European countries like Germany would be facing situations similar to those being enjoyed by Spain. While the crisis in Greece is more closely related to fiscal irresponsibility, the other members of the club are in their own messes for different reasons.

Spain, which has been the focus of much concern recently, is hardly a great example of fiscal responsibility, but it is in its current crisis for reasons other than too much government spending. After the creation of the euro, Spain enjoyed its own housing bubble created in large part by money from banks based in other eurozone members like Germany. When the credit bubble burst much of this investment stopped and the Spanish housing sector was hit badly. Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash. This situation is similar to what happened in Ireland, which also had its own housing crisis.  

That conservatives have been completely misreading the euro-crisis does not mean liberals have read it correctly. In fact, their proposed solutions are just as misguided. Keynesians such as New York Times columnist Paul Krugman like to point to Europe as an area where austerity has been tried and failed. However, the data shows that Europe has not tried austerity. Spending amongst almost all European countries has nominally increased, as have taxes. What little reduction in spending some European countries have seen is due only to inflation.

The reality is that the euro-crisis is a lesson on easy credit and monetary policy. This is not to dismiss the fact that many of the Euro Zone nations were spending too much money. However, as other countries in Europe have demonstrated, it is possible to have similar levels of debt and not face the fiasco being ejoyed by the Greeks and Spaniards. 

In the mists of one of the most significant economic crises in recent memory it is sad to see the side that claims to speak for free markets and fiscal responsibility frequently misrepresenting the nature of the present crisis. Politicians on both sides of the Atlantic should be heeding the lessons of what is happening in Europe. It's a shame it looks like so many of them won't.