Another Look at the European Debt Crisis

Unless European officials can find a viable solution soon, the continent’s sovereign debt crisis threatens to derail the increasingly fragile world economic recovery. The conventional wisdom blames Greece, Portugal, Spain and Ireland — the poorer “peripheral” countries at the center of the crisis — for “living beyond their means.” In an important new paper, however, Vicente Navarro, professor of public policy at Johns Hopkins University, offers a compelling alternative explanation for the mess.

Navarro observes that for much of the postwar period all four of these countries were largely ruled by right-wing regimes, including military dictatorships in the case of Greece, Portugal and Spain. In Navarro’s view, today’s sovereign debt crisis has its roots in this authoritarian history, which produced weak welfare states relative to the rest of Europe, and, even more importantly, left all four countries with woefully underdeveloped tax systems that are the real source of the squeeze on sovereign debt.

As Navarro notes, tax revenues in Greece, Portugal, Spain and Ireland are low: “approximately 34% of GNP in Spain, 37% in Greece, 39% in Portugal, and 34% in Ireland, compared with the EU-15 average of 44%, and…54% in Sweden.” He continues:

The super-rich, rich, and high-income upper middle classes do not pay taxes at the same level and intensity as those in most of the central and northern EU-15 countries – a consequence of a history of government by ultra-right-wing parties. Of course, progress has been made since the dictatorships ended. But the dominance of conservative forces in the political and civil lives of these countries explains why their state revenues are still so low.

In fact, using as a benchmark the experience of other European economies that have avoided a sovereign debt crisis, none of these four countries is living beyond its means: “In Spain, for example, the GNP per capita is 94% of the EU-15 average, but public social expenditure per capita is only 72% of the EU-15 average.”

The essay concludes with a set of alternative political and economic solutions to the debt crisis. A key component is increasing the size and progressivity of tax revenues in the countries in crisis. Other crucial components are a European-wide fiscal expansion and programs of direct job creation in areas where unemployment remains stubbornly high.

As Navarro argues: “The problem of the public debt is thus basically a political, not an economic or financial one.”

(This post originally appeared at The CEPR Blog.)

2 Comments

  1. Jack Funchion says:

    Are you really arguing that Ireland has had right-wing governments for the past 40 years?

  2. John says:

    Sorry if my summary of Navarro’s paper wasn’t clear on this. He isn’t arguing that these countries have been ruled by right-wing governments over the past 40 years. What he is saying is that during the decades immediately following World War II, when almost all European countries were establishing and expanding the main lines of their contemporary social welfare systems, Spain, Portugal, Greece, and Ireland were ruled primarily by right-wing governments. Navarro writes: “All of them were governed by fascist or fascist-like dictatorships (Spain, Portugal, and Greece) or by authoritarian right-wing governments (Ireland) for most of the period from the late 1930s or early 1940s until the late 1970s.”

    In his view, the proof of the right-wing leanings of these governments is in the pudding. In addition to the low levels of taxation, which I cited in the post, Navarro also shows that Ireland has a much lower share of social expenditures as a share of GDP (22.1 percent) than the EU-15 average (27.0 percent); a lower share of public employment (12 percent) than the EU-15 average (15 percent); and a higher Gini coefficient (0.313) than the EU-15 average (0.292).

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