Excessive spending as the main reason for current economic misery can only be attributed to one of the five Euro Zone nations: Greece. Greece joined the euro at the beginning of 2001 after failing to join in 1999 because it did not meet the required economic criteria for membership.
In 2001 Greek debt to GDP was almost 104 percent. At the same time, most of the other Euro Zone nations had much lower debt to GDP. Ireland’s debt to GDP was 35.1 percent, Portugal’s was 53.5 percent, and Spain’s was 55.6 percent. In fact, in 2001, Germany’s debt to GDP was higher, at 59.1 percent, than the debt to GDP rates of Ireland, Portugal, and Spain. Italy is the exception; it was enjoying a debt to GDP rate of 108.2 percent in 2001. However, unlike Greece, Italy’s debt to GDP has stayed comparatively stable. So, it is far too simplistic to say that excessive spending is what has led to a crisis in “Europe.” Were spending alone to be blamed then more of the “northern” European countries like Germany would be facing situations similar to those being enjoyed by Spain. While the crisis in Greece is more closely related to fiscal irresponsibility, the other members of the club are in their own messes for different reasons.
Spain, which has been the focus of much concern recently, is hardly a great example of fiscal responsibility, but it is in its current crisis for reasons other than too much government spending. After the creation of the euro, Spain enjoyed its own housing bubble created in large part by money from banks based in other eurozone members like Germany. When the credit bubble burst much of this investment stopped and the Spanish housing sector was hit badly. Because much of Europe now shares a currency it was impossible for Spain to make the necessary adjustments to deal with the crash. This situation is similar to what happened in Ireland, which also had its own housing crisis.
That conservatives have been completely misreading the euro-crisis does not mean liberals have read it correctly. In fact, their proposed solutions are just as misguided. Keynesians such asNew York Times columnist Paul Krugman like to point to Europe as an area where austerity has been tried and failed. However, the data showsthat Europe has not tried austerity. Spending amongst almost all European countries has nominally increased, as have taxes. What little reduction in spending some European countries have seen is due only to inflation.
The reality is that the euro-crisis is a lesson on easy credit and monetary policy. This is not to dismiss the fact that many of the Euro Zone nations were spending too much money. However, as other countries in Europe have demonstrated, it is possible to have similar levels of debt and not face the fiasco being ejoyed by the Greeks and Spaniards.