The Euro and the Uncertain Moral High Ground

When a morality play is put on stage it is easy to mistake the simplified plot lines for reality. When the audience announce that they are about to use the play to guide their real life decisions it may be better to first do some sort of a reality check before assuming the play accurately reflects the key issues.
We need look no further than the current chaos in Europe to see how easily the lines of distinction between the play and reality have become blurred.
The script for the play is very simple and the audience particularly those watching in Germany and the US seem agreed that the moral choices are clear and stark. The profligate Spaniards and Greeks (and some other equally foolish rakes) have racked up huge debts while the hardworking Germans and Dutch have worked until they alone have the surpluses to bail out their foolish cousins. And further, the good responsible Dutch and German saviours should not help until the Spanish and the Greeks immediately follow the example of the cautious and responsible Germans and first put in place the rules for austerity and fiscal National responsibility that they should have had all along. It is hard to be sympathetic with the prodigal sons.
Well that is what the common wisdom says describes the situation. The only catch is that the evidence does not support the script of the play.
If we take the Spanish for example, it is simply not true that they were racking up huge national debts while the Germans were leading by example. In 2007 – prior to the crisis it is true that Spain had taken its national debt to 36% – but according to the EU figures at the same time those careful Germans had a national debt of 65%. Hah! You may well say, but that was 2007. What about last year? Well last year, while the US debt had risen to 93% and Germany’s had risen to 83%, and although Spain too had risen it was actually only 61%. Whatever was the cause for Spain’s present woes then it was not their policy of national borrowing.
What actually appears to have happened is this. The European Central bank sets the borrowing rates. Germany with its huge economy was able to appeal for appropriate interest rates, but those rates were totally inappropriate for Spain. This in effect meant bank interest rates were so low that the best way Spanish private citizens could make money was to follow the US lead and borrow, and as elsewhere use the borrowed money to invest in housing. It is now history that the international markets encouraged this move by on-selling the private debt and as with Lehman Bros, the huge housing bubble burst. As in the US, the Spaniards scrambled to pay off the private debts as unemployment soared (in Spain’s case to to 23%) and the economy ground to a halt.
The solution of encouraging national austerity in countries like Spain, which does seem attractive to those who believe the morality play script, may therefore be almost the opposite of what is required in practice. Austerity means fewer jobs (particularly in the public sector), less money in the community to stimulate the economy, and without growth it is hard to envisage a means of repaying the inevitable debt to any States prepared to assist with a bail-out. Encouraging other European nations to do the same is unlikely to make them more able to purchase manufactured goods from the saviour states like Germany and the Netherlands so it might also be argued that Germany and the Netherlands should be acting against their own self interest in insisting that those they assist become more fiscally austere. Austerity appears to be worsening problems in Greece and Portugal, so it is not immediately obvious why this same formula will work in Spain.
Your comments please.

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