I am preparing a class on the crisis, and for the first time I have put together in a single place the actual numbers that I discussed sparsely in the past. Taken all together, they are even scarier. So scary, that I want to share them.
First, I will try to disentangle the “Berlin View” of fiscal profligacy from the “global imbalances” story (I discussed this at length). If the crisis were a tale of fiscal profligacy, we should observe a clear pattern: The countries that are in trouble should have had very poor fiscal positions from the outset. Or did they? Here is debt and deficit for Eurozone countries in 2007:
The supposedly bad guys, the so-called PIIGS, are the red dots, and have very different positions. A clear culprit, Greece, a country that is around the Maastricht limits, very similar to France (Portugal), and another with large debt, but affordable deficit, Italy. And wait, I forgot Spain and Ireland, substantially more virtuous than Germany and other core countries (in datastream jargon BD is Germany, by the way). There is no clear relation between fiscal positions before the crisis and the current problems. And we all know that Spain and Ireland got into trouble because they had to manage the monstrous private debt that had piled in the housing and in the banking sectors. What about the global imbalances view? Well, look at this:
Here the pattern is clear. The countries in trouble all had large current account deficits in 2007, while the core countries had a surplus. By looking at this picture it is clear that some countries spent globally (private plus public sector) too much, and others saved too much. This calls for symmetric adjustment (have been there). No bad guys in town, just a bunch of partners who have to work together a way out of the crisis. Side remark: The green bars are 2012 forecasts. Very little adjustment occurred, especially on the surplus side.
To summarize, stylized facts (I would not go as far as calling them “evidence”) point to the global imbalances view; the Berlin view needs additional work to be convincing.
And yet, the Berlin view won (welcome to Europe…) and the only thing three years of summits gave birth to is a super-restrictive version of the Stability Pact, the (in)famous fiscal compact. Will it work? Looking at Greece, I have some (!) doubts. And here comes the third graph I will show to my students, the scarier of them all
Making 2007 equal to 100, GDP is down to 83 in 2011, almost a 20 per cent output loss! Is this short-term pain for long-term gain? Nothing is less sure. First, debt is not more sustainable today than it was in 2007. Last week’s de facto default witnesses it. Second, even more important, investment (pink line) was cut in half since 2007. This means that Greece is not only going through depressed growth today. But it is doing it in such a way that growth will not resume for years, as its productive capacity is being seriously dented.
What makes it sad, besides scary, is that behind these curves there are people’s lives. And that all this needed not to happen.