Finally, reason!

For a long time market monetarists have argued that the EZ crisis was not a debt-deficit fueled crisis but an NGDP crisis. Now, Avinash Persaud, of the Peterson Institute for International Economics “explodes the innocence of debt numbers”, certainly to the chagrin of the Weidman crowd!

One of the few things that can be said with any certainty regarding the recent European debt crisis is that there is much distance between the popular narrative and the narrative of the numbers. The popular perception is that the countries with a debt crisis have long been on an unsustainable fiscal path. They have deep-seated structural problems, are burdened with a lazy workforce, tax-avoiding businesses and spendthrift, corrupt, governments.

Empirical studies are trotted out to suggest high ratios of public debt stifles growth, enveloping these luckless countries into a debt trap. The obvious solution, it would seem, is for them to carry out profound cuts in public expenditure. However, look at average primary budget balances during the fifteen years between the 1992-1993 crisis in the European Monetary System and the 2007 start of the Global Financial Crisis, and the fiscally conservative countries with average primary budget surpluses of 2.1 per cent and 2.4 per cent respectively are Italy and Spain. Germany just breaks even and does only a tad better than France, which has an average primary budget of -0.2 per cent, marginally better than Greece’s -0.5 per cent.

The numbers do not tell a tale of the inevitability of fiscal crisis. Almost all of the deterioration in the French and Italian budget position since 2007 can be put down to the decline in economic activity. As much as 80 per cent of the deterioration in the fiscal position in Spain, Greece and Portugal can also be explained by below potential growth and the rest by one-off bank rescue programs. That does not smack of deep structural problems requiring growth-deadening policies, but a problem of not enough growth.

The charts:

For the EZ as a whole

Debt Innocence_1

For “marginalized” Spain

Debt Innocence_2


One thought on “Finally, reason!

  1. This is a profoundly poignant point. It matters not how many times the Greek government collapses nor how many times the Greeks go to the polls. They cannot vote for anything that can impress upon the ECB that their future matters; and so they are stuck in a viscous cycle of dysfunction as permanent members of the “sacrifice ratio” class. Nobody has told them that the economic tragedy for the last handful of years stems from the euro and mismanagement thereof.

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