September 24, 2013
The hit to Europe’s economy from the collapse of its housing bubbles has been larger than the downturn it suffered in the Great Depression. So naturally the assessment of columnist Charles Lane on the Post op-ed page is:
“So far, Merkel has managed the crisis of the euro zone well.”
It’s not clear what would count as managing the crisis poorly, although Lane does tell us in the next sentence that in his view the breakup of the euro would be the ultimate disaster. If keeping the euro together is the sole criterion, regardless of how many trillions of dollars of lost output results, and however many millions of lives are ruined by prolonged unemployment, then I guess the euro crew is a winner.
Lane’s piece is deeply mired in confusion. Early on he tells readers;
“Two contradictory fears threaten these Germans’ contentment: what might happen if the government spends their hard-earned national savings on a bailout for Greece or Italy, and what might happen to Europe if someone doesn’t prop up those spendthrifts.”
Of course the most obvious route to restarting Europe’s economy would be to have the European Central Bank (ECB) act like a central bank and agree to underwrite the sort of deficits that will be needed to bring Europe’s economy back to full employment. This does not require using any of Germany’s savings. In fact, by boosting Europe’s growth it is likely to increase Germany’s “hard-earned national savings.”
Lane is also confused about the nature of budget deficits in Europe when referring to Greece and Italy as “spendthrifts.” While the former characterization has some real foundation, this description of Italy might seem a bit dubious to folks familiar with the data. Here’s a chart showing the primary deficits (this excludes interest payments) of two euro zone countries since 2000.
Source: International Monetary Fund.
If you guessed that Country B, the one that has generally had the larger primary budget surplus, is that spendthrift Italy, you got it right. In fact, Italy has had substantial primary budget surpluses for most of this century. It did have a large debt built up over prior decades which gives it a large interest burden now. The other reason that it has a large interest burden at present is the decision by the ECB to maintain a degree of ambiguity as to whether it would stand behind Italy’s debt. If it ended this ambiguity, the interest rate on Italy’s debt would be little different than the interest rate on German debt. This would make the country’s debt burden easily manageable.
Note: Country reversal corrected, thanks Joe.
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