The Eurozone - Too Big to Save?

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Greece spent its way into trouble. But that's not true of the other troubled Eurozone economies, argues Mark Blyth. It was private borrowing, not public spending that pushed the Eurozone into trouble.

We need to remember that what we refer to today as the ‘European Sovereign Debt Crisis’ began as a private sector financial crisis back in 2008, when ‘too big to fail banks,’ writing deep out of the money options on taxpayers, quite unexpectedly (to some) blew up. Fearing a financial Armageddon, governments transformed private bank debt into public debt via bailouts, lost revenues, lower growth, higher transfers, and yawning deficits. The unavoidable result across the European continent was a massive increase in government debt. While painting this as a story of fiscal irresponsibility has some plausibility in the Greek case, it simply isn’t true for anyone else. The Irish and the Spanish, I and S in the eponymous ‘PIGS’ were, for example, considered ‘best in neoliberal class’ in terms of debts and deficits until the crisis hit. Public debt is a consequence of the financial crisis, not its cause.

Misdiagnosing the problem only makes it harder to solve.

Europe has reached a point where its collective bank exposures are bigger than its collective bailout capacity.