The Wrong Narratives

Michael Stephens | May 30, 2012

News sections are littered with shortcuts for explaining what’s going on in the eurozone, often featuring easy, morally sodden narratives. But the real problem here is not that narratives and other shortcuts are being employed—after all, sometimes the data need a little help.  The real problem is that they’re using the wrong narratives.

We’re told more often than not that the reason peripheral countries like Spain are in trouble is that their governments engaged in an irresponsible spending binge and are now reaping the consequences.  But in 2007 Spain’s debt-to-GDP ratio was low—a quaint 27 percent of GDP—and had been falling for some time.  Likewise, by contrast with the Aesop-flavored conventional wisdom, German ants work 690 fewer hours per year compared to their Greek grasshopper counterparts.  But this doesn’t mean morality has no place in an assessment of Europe’s economic woes.  Today, for instance, the imposition of austerity and the waste of human potential this is generating—even as austerity fails to summon the “confidence” and growth that was promised and fails to make a significant dent in debt-to-GDP ratios—begs for moral judgement.

And while a technical analysis of the basic setup of the EU and all the imbalances it has generated can get you most of the way toward explaining what’s going on (take a look at the private debt ratios displayed in this graph), this doesn’t mean that domestic political considerations in the peripheral countries haven’t played a part.

But the problem, again, is that the conventional story you’ll find in the press (profligate southern European governments coddling their workers) is problematic.  The parts of the EU that are regarded as being in the least amount of trouble also feature some of the more generous social welfare supports.  And as C. J. Polychroniou observes in a new policy brief, social democracy of the northern European variety never really took root in southern Europe.  Instead, Polychroniou argues, in countries like Greece, Spain, and Portugal, even the left-leaning parties tacitly accepted a neoliberal path, ushering in comparatively regressive policies over the last several decades, including the privatization of public assets and an underinvestment in education and human services (on the whole, public expenditures in these countries are less generous than the EU average).  This, combined with political cultures that rely heavily on clientelism, is part of the reason why southern Europe is where it is, according to Polychroniou:  regressive policies failed to deliver sustainable growth and have made a bad structural situation even worse.


2 Responses to “The Wrong Narratives”

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  1. Comment by WojMay 30, 2012 at 3:27 pm   Reply

    Totally agree that the conventional story misrepresents cause and effect. The real issue is that Private Debt Continues to Drag Down Europe (

    From that post:
    “Acting in a similar manner as the US private sector during the previous decade, the private sector in peripheral Europe largely borrowed from abroad to support current consumption and investment in housing. Rising debt levels were manageable, for a time, without an increase in incomes as long as asset prices were rising and new credit was available to service current debts (Minsky considered this stage “ponzi” finance). When asset prices stopped rising and credit became more restricted (which must always happen), the private sector was forced to reduce consumption and investment to pay debt servicing fees and attempt to deleverage.

    This above dynamic is especially important for understanding Spain, where sovereign debt levels (at least those officially reported) are not particularly high. Spain’s housing bubble, however, continues to decline putting further pressure on private sector balance sheets. The public and private sectors cannot both successfully deleverage, in tandem, without destroying incomes and growth. Debts that cannot be repaid, will not be repaid.”

  2. Comment by WojMay 30, 2012 at 3:29 pm   Reply

    Edward Harrison at Credit Writedowns discussed a similar topic the other day as well in the following post on, Why can’t people understand national accounting?

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