Northern Saints and Southern Sinners: How the Euro Crisis Shaped Today’s Euroscepticism

The European debt crisis might not be the root of all of Europe’s woes, but it serves as a critical turning point in the EU’s success story. Dominant media narratives blamed Southern Europe’s fiscal mismanagement, deepening EU divisions. However, Northern nations share equal responsibility, and their refusal to acknowledge it has created dangerous frictions within the EU.

Beggar Thy Neighbour

Concerns about the single market and monetary union emerged early on, due to the structural differences in development between EU countries. In the 2000s, highly developed, albeit smaller, Northern economies were running large export surpluses. In the mid-2000s, they were joined by the EUs biggest economy, Germany, as it came out of the post-unification recession. It escaped the recession through “beggar-thy-neighbour” policies: pushing wages downward through austerity and outsourcing parts of its production to Eastern Europe. As Heiner Flassbeck notes:

“A comparable product, which in 1999 had been sold at the same price in all EMU member countries, could be sold by Germany in 2010 at a price that was 25% lower, on average, than in other EMU countries, without any change in the profit margin of the German producers.”

These policies came at the expense of Southern economies, as they now had to absorb continuously larger exports due to the relative size of the German economy. This is visible in the current account surplus of Northern and the deficits of Southern European nations in the graph below.

To understand the impact of imbalances, consider the lens of employment. An export surplus means a country produces more than it consumes domestically, relying on foreign demand to sell its excess and keep the people that produce the surplus employed. Usually, the exporter’s currency would appreciate, making their exports less competitive and imports cheaper, leading to a rebalancing. This wasn’t possible in the EU. So, countries let exports replace domestic production and shifted employment to another sector sustained by debt and investment. The only other alternative was making exports competitive through German style austerity, a political non-option.

This is what happened in Spain. Foreign investment created a large, debt-driven construction and property boom, and resources were shifted to that sector, as industrial production was neglected, since Northern absolute advantages made Southern industry less profitable Spain, therefore, couldn’t produce the goods needed for the boom and had to import them, primarily from Germany, increasing its trade deficit. German profits then flowed South, fuelling the boom again and creating a bubble. Similar versions of this story were occurring in other Southern nations, all ending in deindustrialisation and debt build-ups.

The last part of the puzzle is the banking system that allocated these capital flows in the South due to higher returns there. Large imbalances meant large amounts of funds that increased the banks’ balance sheets to the size of the GDP of large European countries. It was in this context that both the subprime crisis in 07/08 and the Euro crisis hit. To make matters worse, the EU was completely unprepared for what was to come.

Austerity as Repentance

When Greece revealed the financial misreporting of its deficits in 2009, the EU was paralyzed and completely botched the response. Losses in both public and private credit put the banks’ balance sheets in danger. But after 07/08, the public wouldn’t have supported another bank bailout. In the end, what was agreed upon was essentially a bank bailout disguised as a government bailout. On the then dominant media narratives Matthijs and McNamara comment:

“Hard work, prudent savings, moderate consumption, wage restraint, and fiscal stability in Germany were seen as Northern virtues and were juxtaposed to the Southern vices of low competitiveness, meager savings, undeserved consumption, inflated wages, and fiscal profligacy in the Mediterranean. The solution to the crisis accordingly became one of ‘necessary’ pain and atonement in the countries of the periphery.”

Greece, and later other Southern European nations, had no choice but to accept severe austerity, the consequences of which are still felt today. Those who had to “atone” the hardest were the least responsible. People across the South paid the price, while those that profited, namely banks, creditors and Northern European countries lost very little in comparison.

More importantly, the narrative that Southern governments were spending wastefully doesn’t really hold up. While there was mismanagement and a general lack of economic reforms, Southern borrowing was not excessive. For example, Greek debts accumulated before the 2000s were more detrimental to its economy than those accumulated during the boom. On the contrary, low interest rates even encouraged further borrowing. Furthermore, putting the foot on the break during the boom was politically neither desirable nor feasible.

Redemption for the EU

In response, the EU addressed banking vulnerabilities with new regulations and mechanisms to increase the robustness of the sector, as well as the speed with which it can respond to a crisis. However, the question of the trade imbalances remains, although less intra EU imbalances, but with the rest of the world, as the EUs current account surplus grew after the crisis and other countries notably the USA had to absorb them. Something Trump now seems to be unwilling to do.

The remedy is for the EU to rebalance. Concretely, the EU would have to soften fiscal rules to allow for much needed investments. Northern surplus countries should take the lead here as they are the ones with the power and fiscal space to do so. This would lead to a reduction in exports as more goods are needed domestically and increasing imports reducing imbalances without negative effects on GDP or employment. Further, this would reduce dependence on foreign buyers, making the EU more competitive and stimulating production in Southern economies.

The Wages of Austerity

These anti-European narratives returned with a vengeance in the following years. It is not hard to see why if you look at ordinary taxpayers. Germans had to accept significant wage cuts, lower benefits, and crumbling infrastructure over the past 20 years. The AfD was initially founded as an anti-EU party and has since been channelling strong economic dissatisfaction.

Conversely, people in the South had to endure brutal economic austerity to “atone” for a crisis that was not their fault, to bail out banks they did not support, all while being demonized by the media. As a backlash, Eurosceptic parties like M5S or SYRIZA gained popularity.

This was never a nationalist issue but rather a class issue. However, the dominant narrative reframed it as a nationalist, anti-European one. As a result, Anti-EU rhetoric championed by anti-EU parties did not fall on deaf ears, as the negatively affected, mostly poorer, groups of society seemingly found a remedy to all their problems, allowing their “champions” to continuously gain power.

Divided We Fall

Today, Europe is lagging its contemporaries, and only significant change can help it catch up. A pan-European investment offensive to help its struggling economy and prepare it for the brewing geopolitical storm could get it out of this slump and heal the intra-European rift. In the words of Lorenz von Stein: “A state without public debt is either doing too little for the future or demanding too much from the present”. At present, Europe is guilty of both.

Jonas Bruno