By John Weeks.

The crisis of the euro currency zone is an excellent example of how flagrant lies can successfully be converted into accepted wisdom. Almost every generalization about the crisis found in the mainstream media is false. As a result, the mainstream punditries on the crisis are ideological polemics masquerading as analysis. Further, often progressive critiques of the reactionary “austerity” policies by the euro zone governments accepts the mainstream faux-facts about the crisis, fuelling the There-Is-No-Alternative (TINA) syndrome.

The mainstream narrative tells a simple story. Several European Union governments, most of them on the southern periphery of the region, have for years languished in economic mismanagement. The principle form of this mismanagement has been social expenditures in excess of what these countries can afford. This excessive weight of the welfare state has left these countries uncompetitive due to excessive labor costs resulting from short hours, high unemployment benefits and early retirement, among other market rigidities.

Thus, the euro crisis results from the welfare state. It will be solved through the drastic reduction of public provision throughout the European Union. Proof of this narrative is found in the excessive debt, deficits and social expenditures of the countries suffering from speculative attack on their bonds (Portugal, Italy, Greece and Spain, the “PIGS”), and the absence of these ills in those few countries not under attack, most notably Germany.

The common response of European progressives to this narrative it that the vast majority of Greeks, Italians, etc, have struggled long and hard for their social benefits, and it is a crime they, the majority, must pay for the greed of a tiny financial oligarchy. To put the mainstream narrative succinctly, in the European South especially, people are paid too much, work too little, receive excessive public benefits and retire too early; and progressives respond that these are legitimate rights forged in struggle.

There is a problem with this diagnosis of the euro crisis. It is false on all counts, left, right and center. To begin with the most obvious lie, the retirement age for the state pension is the same for men in Germany, France and each of the PIGS, 65, though in Italy and Greece women can take the pension at 60. Pension programs allowing for earlier retirement can be found in the PIGS, and that is also true in Germany, the United Kingdom and France, where accusations of labor fecklessness do not dominate discussions of economic policy (except, perhaps, from the employer associations).

What about those short working hours in the crisis-hit countries? This well known “fact” turns out to be the opposite of the truth. In order that the labor statistics not be distorted by the financial crisis, I look at 2007. As Chart 1 shows, the average number of annual working hours per employee in Germany in 2007 was less than 1500 (about 30 a week), compared to the average Greek worker at over 2100 (all statistics from the OECD data base, The statistics show that every one of the PIGS had longer working years than Germany, the closest being Spain with seventeen percent more.

Chart 1: Working Longer in the PIGS
Hours Worked per Year, 2007

Though people in the PIGS may not retire any sooner, and they may work longer hours than in Germany and France, what about the well known fact that excessive social expenditures characterize the euro-south? It may be well known but it is not a fact (see Chart 2, again, OECD statistics). In 2007, government social expenditure in Germany was 25.3 percent of GDP (pensions, education and health care being the most important). Every one of the PIGS was lower, from Spain over five percentage points below, to Italy at 2.3 percentage points less. This result should surprise no one who has a bit of commonsense: Germany is the only bona fide social democracy in Chart 2, and more social spending is what social democracies do (or should do).

Chart 2: Less Social Spending in the PIGS
Government Social Spending, percent of GDP, 2007

If the peripheral PIGS are not guilty of the mainstream accusation of excessive social expenditure and work longer hours, how do we explain their excessive public debts

and unmanageable fiscal deficits? The answer is straight-forward: the debts are not excessive and the deficits are not unmanageable. An essential element in the mainstream narrative (aka lie) is the fiscal prudence of the German government (and, by implication, Germans in general). Were this prudence fact, we would expect that Germany would have the smallest public debt of the euro zone. We find that it is larger than that of Spain and not much less than Portugal.

Chart 3 shows that in 2007, just before the Global Financial Crisis struck, for Portugal and Germany debt as a portion of national income was the same (44%), and both were more than double the ratio for Spain (19%). Further, Greece, the first of the PIGS to suffer speculative attack on its public bonds, was far from the most indebted of the four, about 80% of national income compared to Italy near 100%. During the crisis relative debt burdens grew for all five countries, because national income declined or stagnated. The bottom part of the ratio goes down and the ratio goes up, an outcome obvious and much to the delight of public bond speculators.

The debts of Germany, the PIGS and all other countries are excessive if and only if economies do not grow. They pass from excessive to disastrously unsustainable when austerity policies make growth impossible.

Among the most flagrant lies of omission in the mainstream narrative is the admonishment of Spain for its unsustainable debt, without adding 1) it is relatively and absolutely lower than Germany’s, and 2) its increase after 2008 resulted from the public sector nationalizing the private sector’s unsustainable debts.

Chart 3: Who has the smallest public debt?
Net Public Debt as share of National Income, Germany and the PIGS
1995-2011 (Gross debt minus public assets, annual)

The fiscal deficit narrative/lie is similar to that for debts, as Chart 4 shows. In 2007, just before finance hit the fan, Spain could claim the smallest public sector deficit, a surplus of almost two percent of national income. In that last pre-crisis year, only Greece at about minus five percent had a public sector balance in excess of European Union rules (the infamous “Maastricht criterion”). Germany did not have the lowest deficit in 2007; indeed, over the pre-crisis years, 1995-2007, it had the lowest in only one, 2000. Believe it or not, in 1995 (due to temporary factors associated with reunification), the German public deficit was the largest in the European Union, and for three years, 2002-2004, was greater than the deficits of Spain, Portugal or Italy.

Chart 4: Who has the smallest public deficit?
Public Sector Deficit as share of National Income, Germany and the PIGS, 1995-2011 (annual)

To know why the German government could claim a deficit relatively lower than for all the PIGS in 2011 (by less than half a percentage point over “spend-thrift” Spain), look no further than Chart 5. Throughout 2008 all five countries had the same severe recession, with the declines greatest for Germany and Italy. After the beginning of 2009, one country suffered drastic decline (Greece), three “flat-lined” (Portugal, Italy and Spain), and Germany grew in every subsequent three month period. As a result, Germany was the only country of the five with a national income higher at the end of 2011 than it was at the beginning of 2009. Grow and the deficit declines, not rocket science.

Chart 5: Who grew and who didn’t:
Index of Real National Income, Germany and the PIGS, 2007-2011

(Quarterly, 2nd quarter of 2008 = 100)

Why did Germany grow but not the others? It was because Germany economic policy was beggar-thy-neighbor export-led (see Chart 6), implemented through keeping the growth of real wages flat as productivity increased (a policy supported by the Social Democratic Party as well as the Merkelite right). In 2000-2001 German, France and the PIGS all had either small trade surpluses or small deficits. An extraordinary change occurred after 2001. From a small deficit in 2000, Germany began to accumulate enormous surpluses, acquiring the world’s largest net trade balances in some years and second largest in all the others (behind China).

Chart 6: The Marvels of Euro Trade:
External Current Account Balances, Six Euro Countries,
2000-2010, US$ bns

In case it is not obvious that Germany’s export surplus was the PIGS’s trade deficit, look at Chart 7 with the German current account balance measured horizontally and that of the “PIGS” vertically (“current account” is the gross addition to short term national debts, sum of the trade balance, services balance and net income flows such as remittances). In 2001 the current account was zero for Germany and minus US$ 47 billion for the PIGS (Spain accounting for about half of the latter). During 2002-2007, Germany accumulated US$ 785 billion in surplus, while the PIGS added US$ 804 billion to their previously small collective deficit. During the three years of crisis and recession 2007-2010, Germany kept piling on the surplus to the tune of US$ 600 billion, and the PIGS followed in near lock-step with minus 623 billion.

The mainstream faux-news tells us that inefficiencies generated by the welfare state caused the euro crisis and public sector cuts are the solution. The Real News is that German trade policies caused the euro crisis. The “back-story” of the euro crisis is German de facto mercantilism. Through tight monetary and fiscal policy combined with money wage restraint, the German government successfully pursued a policy of export led growth. One does not need to be an expert in economics to know that success in export led growth by one country will result in import led recession for the trading partners when global demand declines, as it did after 2007.

Chart 7: Beggar thy neighbor in the Euro Zone:
Current Account Balances, Germany (horizontal) and the PIGS (vertical),

2000-2010, US$ bns

What is the real solution? In the 1944 Bretton Woods conference that created the IMF and the World Bank, John Maynard Keynes made a bold proposal. He argued that the world monetary and trading system should be governed by the guideline that trade imbalances be corrected through adjustment by the surplus countries.

At that time his proposal implied that the war-torn countries of Europe would not eliminate their trade deficits through austerity policies. Instead, the United States government, enjoying a huge trade surplus, would pursue expansionary macroeconomic policies, which would increase US demand for European exports. The surplus country would expand and import, and the deficit countries would also expand through export demand. This plan, a global full employment policy, suffered total rejection by the government of the United States, which used the Marshall Plan to deal partially with the European trade deficits.

The solution to the imminent collapse of the euro was easily avoided by following Keynes’s proposal. In 2010 thirteen million Greeks lived in a country with a net public debt of 190 billion euros, which was less than one percent of the total assets of the European Central Bank (almost 26 trillion euros). The European Central Bank should have bought the entire Greek public debt, and the German government should have simultaneously embarked on a fiscal expansion. The debt purchase would have definitively precluded speculative attacks, and the fiscal expansion by the zone’s largest economy would have reduced the intra-euro trade imbalances (German imports, the rest export). Any burning desire of the German and French governments to punish the “lazy PIGS” through fiscal austerity would have been limited to Greece and much easier to implement than under euro-zone austerity. The European Central Bank did not do that, German government did the opposite of expansion, and now there are four countries at the brink instead of one (five if you count Ireland), plus the euro itself, of course.

When at Bretton Woods Keynes predicted that the US plan would result in recession and financial collapse for deficit countries he could have hardly imaged it coming in such virulent and irrational form as the current German-fostered and French- abated euro crisis. That’s the Real News about the euro.

John Weeks

John Weeks is Professor Emeritus and Senior Researcher at the Centre for Development Policy and Research, and Research on Money and Finance Group at the School of Oriental & African Studies at the University of London.