Chronicles of the Second Great Depression (3). The increase and subsequent decrease of government deficits in Euro countries
The present Euro problems are not caused by the (consolidated) Eurozone deficit. The consolidated deficit of the Euro area is half the size of the UK/USA/Japan one and total government debt is manageable (though we do have to ring-fence the banks). Which means that the problems are political, connected with the design of the Eurozone (thanks to Hans-Werner Sinn we now know for instance that Target-2 like problems in the USA are solved with a kind of ‘Mickey Mouse’ dollars! In Europe they can partly be solved by combining the central banks of Germany and Italy as well as the central banks of the Netherlands and Spain).
The political problems may however arise because of free rider policies of some countries, which keep squandering the money which others earn and which continue to have high deficits. In earlier post we’ve however seen that deficits increased everywhere and, in most countries, with roughly the same amount (6,7% of GDP+/- 2% of GDP). Differences between countries are not really caused by this increase (except for Ireland, which with the 100% approval of the ECB and the IMF and the EU spent so much on saving the banks). Differences might however be based upon subsequent developments. Are they? From the fourth quarter of 2009 onwards deficits started to decline again in an ever-increasing number of countries, Ireland being the last. Though the cut off point (2011-IV) is somewhat artificial these data are quite interesting: the hypothesis that somebody like Jan-Kees de Jager, minister of finance of the Netherlands, tries to squeeze the Greece to enable the Netherlands to mitigate the reduction of its deficit can not be rejected.
The graph shows the increase of deficits in Euro countries during the first phase of the Second Great Depression and the subsequent decline afterwards (country specific periods, until 2011-IV). The net increase of deficits during the entire period is also shown. Mind: the graph shows changes. The net change in for instance Finland was quite negative, but as this country had sizeable deficits before the crisis its present deficit (2011-IV) is limited. The Eurozone countries Cyprus, Malta and Luxembourg were left out, Lithuania and Latvia were added to enable a better comparison of developments in Greece and Portugal.
What stands out?
* Deficits decreased everywhere, during the second phase of the Second Great Depression. No free riders there.
* But they are everywhere still larger than before the crisis. No free riders there.
* Deficits decreased fast: the developments shown in the graph took place in between 8 (Belgium, Estonia) to 4 quarters (Finland, Germany).
* Deficits in Portugal and Greece and the Baltics decreased very fast, at the cost of wrecking these countries. This cost has clearly been too high. However – if there are any free rider it’s not Portugal or Greece.
* Countries like Finland and the Netherlands did a really good job when it comes to government deficits. Instead of wrecking their societies they chose to mitigate the decrease. Well done, this was a wise and thoughtful policy(at this moment, the Netherlands are even without additional austerity already in the middle of an outright depression in combination with an ever faster decline of house prices which, That’s not the moment to slash the deficit). However. People like Jan Kees de Jager should really stop telling that Greece has to keep wrecking its society to bring down the deficit – as the Greek already did this and as the Dutch at home clear didn’t do this. If any country is free-riding it’s not Greece.
In the Eurozone, there is clearly no reason to panic about deficits. But there is reason to panic about the social and political and even economic fabric of entire countries – as they really try to wreck each other. Never thought that I would write that.