Benjamin Studebaker

The other day I found myself in conversation with one of my fellow students about whether or not the British government had too large of budget cuts too soon in the economic recovery. I argued that it was fairly self-evident that it had done so, considering the superior economic performance of most nations that had refrained from issuing cuts or embarked on a policy of stimulus. The response he gave me was an interesting one–he argued that the advantages being enjoyed by the stimulus countries were short term, and advised me to look at France, a country that had refrained from austerity and has recently had its credit rating reduced by Moody’s, is seeing stagnant growth rates, and has a host of other problems. I responded that Eurozone countries were in a different kind of economic crisis from countries like Britain and America, and that different rules applied–this was met with scepticism, as if I were trying to weasel my way out of the point. So today I would like to make the broad argument that the economic problems being experienced in non-Euro countries like America, Britain, Japan, and Canada are of a fundamentally different nature from the kind being experienced in France, Spain, Portugal, and Greece. So different, in fact, that comparing the former to the latter is intellectually useless.

A brief note on methodology–we will be using all of our data from Trading Economics, which compiles data from various states and international organisations worldwide. We will compare four of the major economies of both the Eurozone and non-Eurozone type presently involved in the debt debate–America, Britain, Japan, and Canada for the non-Euro category, and France, Spain, Portugal, and Greece for the Euro category.

First off, let’s see how indebted these various countries actually are:

Debt to GDP, Non-Eurozone:

JPN: 211.7%

USA: 103.0%

UK: 85.0%

CAN: 85.0%

Average Debt to GDP, Non-Eurozone: 121.2%

Debt to GDP, Eurozone:

GRC: 170.6%

PRT: 108.1%

FRA: 86.0%

ESP: 69.3%

Average Debt to GDP, Eurozone: 108.5%

Now, let’s see how much it costs for each of these countries to borrow more money, as of today:

10 Year Bond Interest Rates, Non-Eurozone:

JPN: 0.74%

USA: 1.68%

UK: 1.85%

CAN: 1.77%

Average 10 Year Bond Interest Rate, Non-Eurozone: 1.51%

10 Year Bond Interest Rates, Eurozone:

GRC: 16.3%

PRT: 7.8%

FRA: 2.2%

ESP: 5.7%

Average Debt to GDP, Eurozone: 8.0%

Japan runs a debt that is nearly twice as large relative to the size of its economy as that of the United States, and is more than twice the size of Britain’s or France’s, yet boasts the cheapest borrowing costs of all the nations we’re looking at. Spain has by far the smallest amount of debt relative to the size of its economy, yet suffers from borrowing costs far in excess of the non-Eurozone countries and even of France. There are two ways to interpret this data, as I see it:

1. It is only through some inexplicable miracle or some kind of market irrationality that all the non-Eurozone nations are not experiencing debt crises of their own. At any moment now the interest rates on their bonds will soar and they’ll face terrible crises that will force them to do austerity, so they should do austerity now before that happens.
2. There’s no such thing as an “inexplicable miracle” in economics–there is actually a reason that debt is a problem for Eurozone nations but not for non-Eurozone nations.

Unless you are committed to irrationality full stop or have never come into contact with any actual economic data and so have an excuse, the first position, the one that most people buy into, flies in the face of evidence and requires a quasi-religious belief in the fear of debt.  It is far, far more likely that there is an actual reason for this difference that can be explained. Again and again the pundits and commentators have been saying that debt crises are right around the corner for non-euro nations, and they never come to pass. There’s a reason why.

So now we have to ask ourselves what is so different about being on the euro? Why are countries on the euro experiencing this economic crisis very differently form non-euro countries?

The best answer, I think, is to look at what countries that are outside the euro can do that countries inside the euro cannot do–monetary policy. Monetary policy is the ability of a state to control the supply of money in the economy. In the United States, the Federal Reserve does it. In Britain, the Bank of England does it. In Japan, the Bank of Japan does it. In Canada, the Bank of Canada does it. However, in France, Portugal, Spain, and Greece, monetary policy is conducted by a single bank, the European Central Bank, which takes its marching order from Berlin.

What does this mean? Well, let’s suppose that speculators and bond vigilantes all decided that one of these non-Euro countries really did have a debt problem, and they all refused to buy the bonds of this country and pushed the interest rate sky high. What happens then? Well, we have some historical points of reference. Krugman recently used the example of France before the euro during the inter-war period; I’ll use the example of the UK in the early nineties.

In the early nineties, bond vigilantes, led by George Soros, though that the UK’s financial situation was not acceptable. They pushed Britain’s interest rates on debt up above 10%. Now, Britain had two options:

1. It could commit itself to hard austerity to demonstrate its fiscal seriousness.
2. It could use monetary policy to devalue the pound so that its debts would be worth less money in real terms.

Britain chose to do the latter and the value of the pound plunged. What were the impacts of this policy? Britain’s exports became much cheaper, British competitiveness improved, and Britain was lifted out of its early nineties recession. Interestingly, in the aftermath of what came to be known as “Black Wednesday”, Britain did not experience a single quarter of contraction until the recent economic crisis.

Now, for the euro nations, this second option of deliberately sinking the currency to reduce the value of the debt and encourage exports is not an option because they do not control the central bank that determines their monetary policy–Germany does. And Germany, which boasts borrowing costs of merely 1.43% interest on 10 year bonds, is terrified that it might experience inflation if it embarks upon that kind of policy for the benefit of France, Portugal, Spain, and Greece. So instead, Germany is holding them hostage and forcing them to do austerity. This reflects a serious problem with the EU as presently constituted–it is too Germanocentric and does not take the interests of all of its members seriously as free and equal European partners. As it stands, the German interest takes priority over all others, and as a result the Germans increasingly find themselves accused of imperialism in the periphery nations (sometimes very crudely through Nazi comparisons, but the point itself is still valid–Germany uses the EU to protect itself at the cost of the other member states).

So the thing you should take away from this, if you’re from a non-euro country, is that your country does not have a Germany. Your nation controls its own monetary policy and can, if pressed, devalue its currency. Even though the word “devalue” sounds like a bad thing, history shows that countries that do this often do very well out of it, particularly first world, developed economies. Your country is not in a similar position to any eurozone nation, nor is it at risk of finding itself in such a position in the future. Your country’s debts are not something you should be worried about–concern yourself instead with your country’s unemployment rate and its quarterly growth figures.

If you’re reading this from a eurozone perspective, I would advise you to recognise that Germany is using you for its own benefit and that, while the EU is beneficial as a partnership of nations for a collective European agenda, it will not work as a tool of German nationalism. Encourage your governments to push for a more federal EU that considers European interests independently from the interests of the individual member states and does not prioritise Germany interests over all the rest.

Finally, if you hear someone comparing any non-euro country to a euro country, recognise that this person does not know what he or she is talking about, and do not heed his or her council on matters of economics.