Crisis in the Eurozone. Costas Lapavitsas
countries. The current crisis is due to the nature of monetary union, to the mode of integration of peripheral countries in the eurozone, and to the impact of the crisis of 2007–9. Public sector debt has become a focus for the tensions that have emanated from these sources for reasons discussed below.
It is apparent that the sovereign debt crisis has not been chiefly caused by state incompetence, inefficiency and the like. Eurozone states have been operating within the framework of the Stability and Growth Pact, the main components of which emerged already in the early 1990s with the Maastricht Treaty. The underlying logic has been that, if the euro was going to become a world reserve currency and means of payment, there had to be coherence of fiscal policy to match the single monetary policy. Rising public deficits and accumulating state debt would have reduced the international value of the euro. The Stability and Growth Pact is important to making the euro a competitor to the dollar.
In this respect, the EU has faced an inherent contradiction because it is an alliance of sovereign states. Sovereignty means little without power and ability to tax, always reflecting the social composition of particular countries. Therefore, a compromise was reached, in large measure imposed by the core countries. The Growth and Stability Pact has imposed the arbitrary limit of 60 percent national debt relative to GDP and an almost equally arbitrary limit of 3 percent for budget deficits that would hopefully prevent the level of public debt from rising. Fiscal policy was placed in a straitjacket that has tormented eurozone states for nearly two decades.
The Stability and Growth Pact represents a loss of sovereignty for eurozone states. However, not all states within the eurozone were created equal. The loss of sovereignty has been more severe for peripheral states, as has been repeatedly demonstrated when France or Italy have exceeded the presumed limits on deficits and debt. It is no surprise, therefore, that peripheral states have resorted to the weapons of the weak, that is, subterfuge and guile. Some of the techniques used to hide public debt have been ruinous to public accounts in the long run. Greece has led the way with persistent manipulation of national statistics throughout the 2000s as well as by striking barely legal deals with Goldman Sachs that presented public borrowing as a derivative transaction. Public–private transactions have also been widely deployed in the periphery to postpone expenditure into the future, typically at a loss to the public.
But fiscal policy has continued to be the province of each individual state, and has remained fragmented compared to unified monetary policy. Furthermore, the Stability and Growth Pact has made no provision for fiscal transfers across the eurozone, as would have happened within a unitary or federal state. There are no centralised fiscal means of relieving the pressures of differential competitiveness and variable integration into the eurozone. The European budget is currently very small, at just over 1 percent of the aggregate GDP of all EU states, which is a small fraction of the German, French, and UK budgets. Moreover, it is not allowed to go into deficit.
This structural weakness of the eurozone has been much discussed in recent years, including during the course of the current crisis.10 What is less discussed, however, is that it also has implications for the ECB. A key function of a central bank is to manage the debt of its state, handling the state’s access to financial markets and ensuring the smooth absorption of fresh issues. A central bank is also able to acquire state debt directly, facilitating the financing of fiscal deficits for longer or shorter periods of time. But the ECB has no obligation to manage the debt of eurozone member states, and is expressly forbidden to buy state debt. On both scores, the ECB does not behave as a normal central bank. The inherent weakness of the ECB is part of the dysfunctional co-ordination of monetary and fiscal policy within the eurozone, which has been made apparent in the course of the sovereign debt crisis.
Rising public deficits and debt due to the crisis
Turning to the actual path of public finances, it is important to note that public finance reflects the historical, institutional, and social development of each country. There can be no generalisation in this regard as welfare systems are variable, tax regimes reflect past compromises, the ability to collect tax depends on the efficiency of the state machine, and so on. Nonetheless, the Stability and Growth Pact has imposed certain common trends upon eurozone states.
Public expenditure declined steadily in the 1990s, with the exception of Greece, where it remained fairly flat (fig. 19). In the 2000s, expenditure stayed more or less flat, except for Germany, where it continued to fall steadily, and Portugal, where it rose gently. Once again, Germany has had considerable success in imposing fiscal austerity on itself, but also on other countries in the sample. Public expenditure turned upward after 2007 as the crisis hit and states attempted to rescue financial systems while also supporting aggregate demand. Once again, Germany is the exception as expenditure did not pick up.
Fig. 19 Government expenditure (percent GDP)
Source: Eurostat
Fig. 20 Government revenue (percent GDP)
Source: Eurostat
Public revenue showed equal complexity, reflecting the particular conditions of each country (fig. 20). Greek public revenue slumped in the middle of the 2000s as taxation was lowered on the rich, while the operations of the tax-collecting mechanism were disrupted. It rose toward the end of the decade, but not enough to make good the earlier decline. The path of Irish public revenue has been the weakest, though an attempt was made to shore things up in the second half of the 2000s. Spain and Portugal maintained reasonable revenue intake throughout. Public revenue declined across the sample once the crisis of 2007–9 began to bite. Recession and falling aggregate demand were at the heart of the fall.
Declining revenue and rising expenditure, both caused by the crisis, inevitably led to rapid increase in public deficits. With deficits rising, several peripheral and other even out eurozone states arrived in the financial markets in 2009 seeking to borrow large volumes of funds. The pressure to borrow appears to have been particularly strong in Greece, Spain and Ireland, less so in Portugal.
Fig. 21 Government primary balance (percent GDP)
Source: Eurostat
Consequently, and inevitably, national debt also began to rise relative to GDP after 2007 (fig. 22). Note that there are significant differences in the volume of public debt among eurozone countries, again reflecting each country’s respective economic and social trajectory.11 But Greek debt, which has attracted enormous attention since the start of the crisis, was not the highest in the group, and nor has it been rising in the 2000s. On the contrary, Greek national debt declined gently as a proportion of GDP in the second half of the 2000s. Only in Germany and Portugal did national debt rise throughout this period, though gently and from a fairly low base. The sudden rise of public debt across the eurozone in the last couple of years has been purely the result of the crisis of 2007–9.
Fig. 22 General government gross debt (percent of GDP)
Source: Eurostat
Public sector performance in the eurozone can thus be easily summed up. The Stability and Growth Pact has imposed a straitjacket on member states, but its effect has been conditioned by residual sovereignty in each state. The fragmentation of fiscal policy has contrasted sharply with the unification of monetary policy. Nevertheless, eurozone states have generally restrained public expenditure, while maintaining a variable outlook on revenue collection. The decisive moment arrived with the crisis of 2007–9, which pushed peripheral states toward deficits. At that point the underlying weaknesses of integration in the eurozone emerged for each peripheral state, including current account deficits and rising capital imports from the core.
There are no structural reasons why the tensions of debt should have concentrated so heavily on Greece. No doubt the country has a relatively large public debt and therefore