28
Feb

What Ails Europe?

Written on February 28, 2012 by Ángeles Figueroa-Alcorta in Europe, Globalization & International Trade, Political Economy

By Paul Krugman

Things are terrible here, as unemployment soars past 13 percent. Things are even worse in Greece, Ireland, and arguably in Spain, and Europe as a whole appears to be sliding back into recession.

Why has Europe become the sick man of the world economy? Everyone knows the answer. Unfortunately, most of what people know isn’t true — and false stories about European woes are warping our economic discourse.

Read an opinion piece about Europe — or, all too often, a supposedly factual news report — and you’ll probably encounter one of two stories, which I think of as the Republican narrative and the German narrative. Neither story fits the facts.

The Republican story — it’s one of the central themes of Mitt Romney’s campaign — is that Europe is in trouble because it has done too much to help the poor and unlucky, that we’re watching the death throes of the welfare state. This story is, by the way, a perennial right-wing favorite: back in 1991, when Sweden was suffering from a banking crisis brought on by deregulation (sound familiar?), the Cato Institute published a triumphant report on how this proved the failure of the whole welfare state model.

Did I mention that Sweden, which still has a very generous welfare state, is currently a star performer, with economic growth faster than that of any other wealthy nation?

But let’s do this systematically. Look at the 15 European nations currently using the euro (leaving Malta and Cyprus aside), and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled GIPSI nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No, they don’t; only Italy was in the top five, and even so its welfare state was smaller than Germany’s.

So excessively large welfare states didn’t cause the troubles.

Next up, the German story, which is that it’s all about fiscal irresponsibility. This story seems to fit Greece, but nobody else. Italy ran deficits in the years before the crisis, but they were only slightly larger than Germany’s (Italy’s large debt is a legacy from irresponsible policies many years ago). Portugal’s deficits were significantly smaller, while Spain and Ireland actually ran surpluses. Read more…

As published in www.nytimes.com on February 26, 2012 (a version of this op-ed appeared in print on February 27, 2012, on page A19 of the New York edition with the headline: What Ails Europe?).

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