International Conference on

Debt and Austerity Policies in Europe.

The Proposals of the European Left
organized by The Party of the European Left,
Synaspismos and Transform! Europe
10th – 12th March 2011

Causes of the Debt Crisis

in the Eurozone
by
Prof. Dr. Brigitte Unger
Utrecht University School of Economics

1
 Causes of the Debt Crisis
in the Eurozone

1. Is there a debt crisis?

2. Public debt perception in history and in theory...its

ups and downs

3. True crisis is systemic – unfair income and wealth

distribution

•
Causes of the Debt Crisis
in the Eurozone
1. Is there a Debt Crisis?

Public Debt in the Eurozone has increased

Especially after the financial crisis in 2008
1. Is there a Debt Crisis?
Public debt and deficits till 2014
Public de ficit 2010 Public de bt 2007-2014
in % of GDP in % of GDP
300

250
0
200
-2

-4 150

-6 100

-8
50

-10
0
-12

-14
2007 2014
Source: IMF, Economist, OeNB
1. Public debt in percent of GDP in 2009 in
Europe

2009

140

120

100

80
2009
60

40

20

0
T L E U K P IN A R C N RL TA X LD L T N
AU BE CZ DE DN ES F FR GB GR HU I I LU N PO PR SVK SVN W
S
 1. Public debt in percent of GDP till 2014 in
Staatsschuld als percentage van het BBP Europe

160%
140%
120%
100%
2014
80%
2009
60%
40%
20%
0%
1. Is there a Debt Crisis?

Europen Union definition of maximum debt is very

narrow. Maastricht criteria of public debt not exceeding
60% of GDP inappropriate.

For the Netherlands I showed that Dutch public debt

could double without having negative effects on growth.
1. Is there a Debt Crisis?

Room for Maneuver for Public Debt is large

Koetsier and Unger (2011) in Economisch Statistieke
Berichten, the Netherlands
45% -52% for small countries
55% - 60% for big countries
Economic growth

90% - 103% for small countries

109% - 120% for large countries

Public Debt
in % of GDP

Threshold
1. Is there a Debt Crisis?

Cause 1 of the Debt ‘crisis’ :

‘Crisis’ is more an EU perception of public debt.

Extrem anti inflation and anti debt policy
dictated by financial markets.

As debt increases: sanctioning of financial

markets..
2. Public Debt Perception in History - ups and
down
Public Debt in the Netherlands and the US in % of
Gross Domestic Product
250%

200%

150%
Percentage

100%

50%

0%
1794 1804 1814 1824 1834 1844 1854 1864 1874 1884 1894 1904 1914 1924 1934 1944 1954 1964 1974 1984 1994 2004
Source: CBS and DSI Databank; OECD Year
Statistics
 2. Perceptions of Public Debt
Play with Fears of Public Debt: Inflation
Inflation Rates - OECD

14
Percentage change on the same period

12

10

8
last year

USA
Austria
6 German

0
1965 1975 1985 1995 2005
Year
2. Public Debt Perception in Economic Theory

Table 1 Predominant View of Public Debt over Time: Its Ups and Downs
Mercantilists Classics and Keynesians Ricardian Equivalence
Neoclassics Public Choice
Public Public
debt debt
is a is no burden,
mine we owe it to
of gold. ourselves.
A state Debts are
without Public debt necessary Public debt means future taxes
debt is is a waste of for full burdens future generations
careless. resources. employment. who have no free choice.
1730 1880 1936 1980 2003
Steuart Smith, Ricardo Keynes Barro, Buchanan
3. The Crisis is a systemic one

Debt crisis is one of the many problematic effects of

globalization...

True cause for financial crisis = cause for debt crisis =

true cause for the next financial crisis....

is unfair income and wealth distribution

14
3. Effects of unfair income distribution

• “alternative investors” for higher asset returns:

in new areas (private equity)
new strategies (hedge funds) of financial investment

• They enhance instability, impose shareholder values for

corporate governance

• and exert considerable pressure on governments

• are interested in low inflation, a large private sector and

low public debt

15
3.Income differential to the 3rd world since 1980

GDP per capita, constant 2000 US$, high vs low income

countries

3500

3000

2500
GDP per Capita

2000

1500

1000

500

0
1980 1985 1990 1995 2000 2005 2010
Time
Source: World Development Indicators, 2009

Low Income High Income (divided by 10)

16
3. Inequality – falling wage shares in
developed countries

17
3. Increase in Unemployment Rates Lettland 22.2

US, EU
F 10

Ö 5.5

NL 3.9

2009
3. Extreme inequality of income
distribution within the rich countries
Previously
1: 2000
An emperor had approximately 2.000 times as much as
his subordonates.

Today:
1 : 1 000 000
Hedgefunds manager John Paulson. In July 2006 he
founded a hedge fund with the sole strategy to bet on
the collapse of the real estate market. In 2007 his Fund
increased by 590%. John earned in this year 3,7 billion
US dollar.

Problem: He cannot spend them in the real sector!

3. The uneven development of real- and financial capital
of businesses United States

Re a lka p ita l Real capital

Fina nzka p ita l Financial capital
300 Equities,
Aktie n, Inve stme ntze rtifika te , so nstig e Be te ilig ung e n
Investment certificates and other investments
250

200
In % d e s BiP

150

100

50

0
1960 1970 1980 1990 2000 2010
3. The uneven development of real- and financial capital
of businesses
Germany
Re a lka p ita l
Fina nzka p ita l
300
Aktie n, Inve stme ntze rtifika te , so nstig e Be te ilig ung e n

250

200
In % d e s BiP

150

100

50

0
1960 1970 1980 1990 2000 2010
3. Imbalance of the Current account
Current account (% of GDP)

100

80

60

40
% change, 1980 =0

Middle East
20 China
Deveolping Asia
Austria
0 France

9 80 982 984 986 988 990 992 994 996 998 000 002 004 006 008 010 012 EU
1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2
-20 Africa
US

-40

-60

-80
Source: IMF World Economic Outlook
Leading economists worry about
increasing disequlibrium

We are outside
the corridor
4. Recommendation

Restore income distribution

If third world
workers
not any more unemployed
low income groups
get higher income and wealth they can buy goods
and services

Entrepreneurs can then sell their products

Taxes get paid
Finance is 1:1 with the real sector and not 6:1
Interest rates are below growth rates

No Public Debt Problem any more!

Thank you

Prof. Dr. Brigitte Unger

Utrecht University
School of Economics
Janskerkhof 12
3512BL Utrecht

Tel +31-30-2539809
E-mail B.Unger@uu.nl