November 15, 2013
Those of us who are old enough recall the origins of the euro crisis remember that countries like Spain and Ireland had enormous housing bubbles, which were fueled by lending by incompetent bankers in countries like Germany and the Netherlands. When these bubbles burst, trillions of dollars in loans lost much of their value. In addition, the driving force for economies across Europe disappeared throwing them into severe recessions.
And, as budget fans everywhere know, government budgets shift towards deficits when an economy goes into recession. The reason is that governments spend more money on things like unemployment benefits. They also lose tax revenue when people lose jobs and income. In short, in the real world, the euro crisis is about a collapsed housing bubble leading to a severe recession. The budget deficits were an outcome of this collapse.
But the NYT has decided to reinvent the history of the crisis. It told readers that the problem in the euro zone was overspending. In an article on a set of budget reviews issued by the European Commission, the NYT told readers:
“The announcement, by Olli Rehn, the European Union’s commissioner for economics and monetary policy, is aimed at keeping tighter reins on national finances to stave off the kind of overspending that fed a crisis that nearly destroyed the euro.”
In fact, of the current group of euro crisis countries, only Greece, and arguably Portugal, had a major deficit problem prior to the collapse. Italy’s deficits were not especially large and Cyprus, Ireland, and Spain all had budget surpluses on the eve of the collapse.