The Germans and the rest of the FANG countries promote the narrative that the PIIGS are lazy countries that have run large deficits for years and now must pay for their spendthrift ways. As a counterargument, I give you the land of my ancestors, the Republic of Italy.
Italy’s budget deficit grew to over 100% in 1992. With the lira weakening and causing high inflation, the Italians adopted an austerity program. For the last twenty years, Italy has been running what economists call a primary surplus. This term means that a country is collecting more taxes than it is spending on government when the cost of the debt service is excluded.
It’s supposed to be a big deal when a profligate country reaches this state. The mainstream media is ecstatic that Greece is close to reaching a primary surplus. Not that it ever will, because it is Greece, but hope springs eternal. We debunked the Greek primary surplus myth here: Greek Primary Surplus Myth Exposed for readers requiring a little background for this post.
Italy’s primary surplus has been very large, 4% of GDP on average for twenty years. This has not stopped Italy’s debt-to-GDP ratio from rising 25 points; that’s 1.25% of GDP per year. What Italy actually needed to do over the last two decades was run a genuine surplus.
If the republic had collected enough revenue to pay down the debt a little every year, it would have created a virtuous circle. Reducing the debt would have reduced the interest necessary to service it. Each year, the amount of money necessary to service the debt would have decreased leaving more money to reduce the deficit further, and so on.
Moreover, Italy’s generational austerity has sapped economic growth for the last twenty years creating less tax revenue to pay down the debt. Italians receive less services while taxes rise, which means they must save more reducing consumption.
Commentators enjoy discussing Italy’s low birthrate, but in light of the economic situation no one should be surprised. In the starkest terms, starting a family is consumption. People cannot afford to start families, so they put it off. Some of them never save up enough to do it.
Italy’s example shows us that austerity is not the answer to Europe’s woes, but this will not stop the FANG from advocating it. Their leaders must answer to their constituents. Giving out money with no strings attached is politically untenable.
The explanation for the woes of the periphery is very nuanced and complex and requires knowledge of economic theory. It is much easier to continue selling the message that the periphery countries are lazy and spend too much money. This message also appeals to the ethnocentric stereotypes held by FANG voters.
The rest of periphery can look to Italy to learn their futures. Continued austerity by Cyprus, Greece, Ireland, Portugal and Spain will at best slow the growth rate of their debt pile but the at the cost of economic stagnation for decades. There is an alternative, but the people of these countries do not wish to explore it. In spite of the negative consequences, they support maintaining their euro membership by a ratio of over 2 to 1: