Southern Europe Did Not Have Heavy Spending on Its Welfare State

December 22, 2015

A NYT article on the uncertain politics in Spain following an election which left no obvious path to a majority government noted that the outcome was in large part a revolt against the austerity imposed on the country. There have been similar revolts in Greece and Portugal. The piece points out the popular discontent and tells readers:

“As the result in Greece showed, even anti-austerity parties have to answer to financial markets and balance national budgets, and the numbers are still deeply stacked against the policies of the old left and their heavy spending on welfare states.”

The countries of southern Europe actually had relatively less developed welfare states. The countries with heavy spending on welfare states are mostly in northern Europe. They have relatively small budget deficits and face extremely low interest rates in financial markets. The difference between these countries and the countries in southern Europe is that the latter collect less money in tax revenue.

It is also worth noting that, least in the case of Spain, the problems with deficits followed the crisis. Before 2008, the country was running budget surpluses and had a very low national debt.

It is also worth mentioning that it is not the financial markets that are constraining Spain and other southern European governments. The decision by Germany and other northern European countries to deliberately keep their rates of inflation very low is requiring the southern European countries to adjust trade imbalances through deflation and austerity.

If these countries still had their own currencies, they would simply allow the value to decline. Within a currency union, it would be expected that the surplus countries would share in the adjustment process by having moderately higher rates of inflation, but Germany and its followers have refused to accept this responsibility.

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