Chronicles of the Second Great Depression (2). The size of government deficits in Europe
In a previous blog, I estimated how much government deficits increased since the crisis, using quarterly data and country specific periods. Graph 2 (the previous blog contained graph 1) shows the maximum size of the deficits.
The difference between the top of the red bars and the bottom of the blue ones is equal to the increase shown in the previous blog. Mind however, that though this arithmetic is rather straight forward, the change is the net result of changes in government revenue, government expenditure and changes in GDP. I’ll come back to this in following blogs. Mind also that these increases are not necessarily the consequence of an activist, Keynesian type of policy but the result of shrinking income and an in increase in spending based upon ‘automatic stabilizers’, like unemployment benefits. Table 1 shows the duration of the increase of the government deficit.
Table 1. The duration of the increase of the deficit
5 quarters – Belgium
6 quarters – Estonia
7 quarters – Italy, France, Germany, The Czech Republic, The Netherlands, Hungary, Sweden, UK
8 quarters – Denmark, Slovakia, Finland, Austria
9 quarters – Latvia, Lithuania, Bulgaria, Greece
10 quarters – Portugal, Spain
14 quarters – Slovenia
16 quarters – Ireland
What stands out?
* Before the Great Financial Crisis, only Greece had a deficit to speak of. Italy had a deficit. And the other countries were financial poster children. Did it make the economy more stable?
* The previous blog showed that countries with a large net inflow of capital (i.e. with large current account deficits) were hit early and hard. This information shows that they, with the exception of Estonia, were also hit quite long. The long duration of the increase in Ireland is of course directly (I mean: directly) caused by austerity policies, which to an extent do not consist of spending little money but, to the contrary, of lavish spending on bailing out banks.
* I was surprised to find out how fast deficits increased (often almost 1% of GDP per quarter…)
* With the exception of Greece and the Scandinavian states there is little relationship between the ex ante deficit and the ex post deficit. And even Denmark and Finland knew deficits larger than -3%.
* There is something special about Belgium, Italy did better than Germany and the countries with low deficits are not really the ‘Anglo Saxon’ societies but more of the ‘Rhineland’ type, which dare to levy taxes.
Constructing these graphs does not really strengthen my believe in the new EU policies, which aim at fine tuning the deficits: “Kurieren am Symptom”, in German. Treating the symptoms, not the malady. We don’t need stable deficits – we need a stable economy.
In some follow-up posts I’ll write a little more about government revenue and expenditure.