Home > debt crisis, Political Economy > Another look at the European debt crisis

Another look at the European debt crisis

from John Schmitt

Unless European officials can find a viable solution soon, the continent’s sovereign debt crisis threatens to derail the increasingly fragile world economic recovery. The conventional wisdom blames Greece, Portugal, Spain and Ireland — the poorer “peripheral” countries at the center of the crisis — for “living beyond their means.” In an important new paper, however, Vicente Navarro, professor of public policy at Johns Hopkins University, offers a compelling alternative explanation for the mess.

Navarro observes that for much of the postwar period all four of these countries were largely ruled by right-wing regimes, including military dictatorships in the case of Greece, Portugal and Spain. In Navarro’s view, today’s sovereign debt crisis has its roots in this authoritarian history, which produced weak welfare states relative to the rest of Europe, and, even more importantly, left all four countries with woefully underdeveloped tax systems that are the real source of the squeeze on sovereign debt.

As Navarro notes, tax revenues in Greece, Portugal, Spain and Ireland are low: “approximately 34% of GNP in Spain, 37% in Greece, 39% in Portugal, and 34% in Ireland, compared with the EU-15 average of 44%, and…54% in Sweden.” He continues:

“The super-rich, rich, and high-income upper middle classes do not pay taxes at the same level and intensity as those in most of the central and northern EU-15 countries – a consequence of a history of government by ultra-right-wing parties. Of course, progress has been made since the dictatorships ended. But the dominance of conservative forces in the political and civil lives of these countries explains why their state revenues are still so low.”

In fact, using as a benchmark the experience of other European economies that have avoided a sovereign debt crisis, none of these four countries is living beyond its means,: “In Spain, for example, the GNP per capita is 94% of the EU-15 average, but public social expenditure per capita is only 72% of the EU-15 average.”

The essay concludes with a set of alternative political and economic solutions to the debt crisis. A key component is increasing the size and progressivity of tax revenues in the countries in crisis. Other crucial components are a European-wide fiscal expansion and programs of direct job creation in areas where unemployment remains stubbornly high.

As Navarro argues: “The problem of the public debt is thus basically a political, not an economic or financial one.”


  1. Dave Taylor
    September 19, 2011 at 12:41 pm

    Vincente Navarro’s new paper is indeed fascinating and significant, but it offers only one perspective on the issues. His seeing ‘right wing’ as fascist or authoritarian obscures the fact that Greece, Spain, Portugal and Ireland were ‘orthodox’ Catholic countries, with a historic culture in which people have been encouraged to sideline oppressive Government by doing for themselves functions (education, health-care and mutual support) elsewhere taken over by the Welfare State. The EU too was initially Catholic: an Economic Community of sovereign nations with their own currencies evolving from an iron and steel cooperative, motivated by a desire to end war and dog-eat-dog working conditions. In the event, the EEC was deflected by American ideas on the balance of power into a US-like EU with a single currency, and financiers have invested in automation rather than manufacturing jobs, which perforce have been replaced by local work in property development and administration (including finance and government).

    The problem we are all facing now is that, having been talked out of Keynes’s international currency, currency controls and progressive taxation, the ‘single currency’ defence against currency speculation has been undermined by globalisation, and the ‘single polity’ route to international justice has been undermined by not-necessarily foreign financiers becoming able to take unjustifiable gains out of countries intending to tax them.

    As I see it, the solution is a Catholic generalisation of the Keynesian one, found in the original ethos and internal financing of the Spanish Mondragon cooperative (see Race Mathew’s “Jobs of our Own”). If the Irish had financed their house-building and welfare services with internal credit worthless abroad, they could have continued to make made the best of what they already had, including that given them by grateful nations wanting to give “to each according to his need”, because of their ability to do so. (An ideal which was Christian long before it was Marxist). Those wanting to trade in money internationally should be required to balance their own books, instead of off-loading responsibility for that onto governments.

    Navarro argues: “The problem of the public debt is thus basically a political, not an economic or financial one.” Yes, but in the structure of the political system, not primarily in the politicians blinkered by it into seeing only more or less of the same. As for the solutions Navarro proposes, Mondragon began creating jobs for the deprived but achieved the effect of progressive taxation more painlessly, by agreement on a narrow scale of salaries and reinvestment of any profits.

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