Profligate government spending did not cause the debt problem

Posted by Kathy Baylis on Sep 30, 2011

Filed Under (Finance)

So I got a bit frustrated while reading a NYTimes piece this morning on the European debt crisis, which had the following statements:

“Just like the United States, Europe built up trillions in debts in past decades.  What is different is that more of the United States borrowing was done by consumers and businesses, while in Europe it was mainly governments that piled on the debt.  Now, just as the United States economy is held back by households whose mortgages are still underwater and  won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means” (pA9)

Governments piling on the debt?  Really??  The first sentence just doesn’t jive with the stats I could find doing a quick morning search.  The authors seem to buy into the old hoary chestnut of European governments digging themselves into debt with lavish spend.  OK – you can take Greece (aside: think Henny Youngman here).  But Ireland and Spain?Ireland went into the crisis with balanced budget and Spain’s government debt has been relatively flat (see Spanish debt chart over time by clicking on Spain in the map.  In Ireland, the government stated it would cover bank losses to stem potential capital flight.  And in Spain, it’s the corporate debt that has increased substantially, and along with it, the worry that the government may have to step in and bail some that corporate debt out (country-by-country primer on the EU debt crisis).   Meanwhile, government bonds are being continually downgraded, causing borrowing costs to skyrocket, and, to quote Paul Krugman, we’re seeing a modern-day version of a bank run, but against governments.

In 2009, Spanish government debt as a % of GDP was lower than that in the US, Canada, Brazil, India, Germany, France… .  In fact, as you click through the countries listed in the map from McKinsey, it’s clear that heading into the crisis, the problem was not government spending increasing, but debt in other sectors.  As an interesting article in the Economist points out, it was the merging of the public and private debt that has many government books on the ropes, in Europe as well as the United States.