Home > Uncategorized > Chronicles of the Second Great Depression (1). The initial increase in government deficits.

Chronicles of the Second Great Depression (1). The initial increase in government deficits.

Government deficits are not what they used to be, partly because of historical developments and partly by design:

* it has become much clearer that governments are responsible for bailing out banks

* the roll-over of debt (which during the last sixty years or so was completely unproblematic) of debt has suddenly become the central problem for the periphery countries in the EU.

* demographics are not as favorable as they used to be

* the financing of the government deficit has become much more international which means that the bond between domestic ‘surplus’ saving (i.e. saving not used for private investments) and the financing of government debt has been broken.

* economic growth is faltering

However – governments run deficits and will continue to do so and we will have to solve some of the problems mentioned above. Any discussion about this will have to be based upon fact – what did really happen? To show how much deficits increased since crisis I’ve calculated the maximum increase in the government deficit for EU countries (except those with less than 1 million inhabitants), using the quarterly Eurostat data.

I took the first two quarters which showed a year on year increase of the deficit of a country as the cut off point for the start of the crisis and the first two that showed a decrease of the crisis as the cut off point for the end of the increase of the deficit. I compared the arithmetical average deficit of the four quarters before the first point with the deficit of the four quarters of the second point while I also constructed a table which shows when the crisis started in the different countries. Ireland is excluded from the graph as its change in deficit is dwarfs the other countries, mainly because of their economic system of msilaicoS, i.e. companies and especially banks owning the state (Bad joke? Read what the (rather extremist) ECB board member Jorg Asmussen has to say about the responsibilities of Ireland and the Irish to continue to bail out the banks and the absolute preponderance of bank debts over unemployment. The official standpoint of the ECB is, at the moment, however that this has to change).

Table 1: the onset of the crisis in different countries

2007-I: Ireland
2007-IV: Spain, Latvia
2008-I: Bulgaria, Estonia, Greece, Lithuania, Romania
2008-II: Italy, Poland, Slovakia, Sweden, UK
2008-III: Czech Republic , Denmark, Portugal, Slovenia, Finland
2008-IV: Germany, Hungaria, Netherlands, Austria
2009-I: Belgium

What do these data show?

* The increase of debt in Italy was quite a bit smaller than in Germany
* Almost all countries saw large increases (more than 5%). Only a few countries, most notably France and especially Italy, did slightly better. But the deficit increased everywhere. The new EU rules about deficits seem simpleminded against this background (for one thing, never underestimate the banks. Dutch social housing corporations suddenly saw their debts increase with 6,1 billion Euro (about $ because the did not read Krugman and hedged, advised by consultants from banks like JP Morgan and Deutsche Bank, their loans against an increase of the interest rate. The world after 2008, and people still trust banks… And yes – there was swindle and corruption and bribery, according to the newspapers clearly instigated by banks like JP Morgan and Deutsche Bank. In the end – this will be added to the government deficit).
* With the exception of Sweden (which devaluated) all countries ended up with deficits larger than -3% (the old EMU threshold, the new one is -0,5%…), even Denmark and Finland which, before 2008, had surpluses of about 5%. See tomorrows blog.
* Countries which knew large inflows of capital before 2007, like Spain and the Baltics and Ireland, were hit first and hardest.

Government debt increased even more in most countries, as part of the bail-out of the banks was not counted as a deficit but was added to the debt.

  1. Podargus
    June 17, 2012 at 7:30 pm

    Just some more evidence that the EMU is a failed experiment.It needs to be put out of its misery in a humane fashion then given a civilized burial.The nations concerned can then get back to running their econmies in a sensible fashion with the aid of their individual sovereign fiat currencies.

    As for demographics,it should be obvious that virtually all nations have overshot their sustainable population levels.An aging demographic is just a welcome sign that the process of population reduction is taking place in something like a civilized fashion.The process is nothing to be afraid of and is manageable
    I’m not so sure that some nations will handle this process so well but the reduction will occur,one way or another. Such is life.

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