Myths and facts of the Euro crisis part 1 – an analysis by João Madeira

The Euro crisis is maybe the most important economic question of the moment. Despite being a highly debated matter, I think that the discussion hasn’t always been the best for it has been too coloured by political sympathies and national pride. In my view, the facts should be the basis of the debate. After all, it is customary to say that one can’t argue with facts. So let’s start by seeing if the opinions frequently made regarding this issue are corroborated by the facts or if they’re instead just myths with scarce support.

The generalised opinion regarding the Euro crisis is that the periphery countries (Spain, Greece, Ireland, Italy and Portugal), that are going through severe difficulties in financing their public debt, are in this situation because they have abused their status as Euro members to finance large increases in public spending at the expense of the virtuous centre countries (Germany, France and Netherlands, among others). But is this true? Let’s look at the evolution of debt for several countries in the table below:

Table 1

One can see, that in the period between joining the Euro in 1999 (2001 in the case of Greece) and 2007 (before the Great Recession), only three eurozone members increased the size of the public debt: Germany, France and Portugal (to this group of “infractors” maybe we should add Greece who resorted to financial trickery to hide the true amount of its debt). Among the virtuous countries, that significantly reduced public debt, one finds Spain, Netherlands, Ireland and Italy.  The great increase in debt of Spain, Greece, Ireland, Italy and Portugal only occurs after 2008. That is, the large increase in public debt of these countries occurs as a consequence of the Great Recession (government spending increased due to the need to pay unemployment insurance, among other social expenses, while revenue fell since firms generate fewer profits) and not as a result of immoral behavior of the periphery countries. The generalised image of immorality of periphery countries (it is symptomatic that the media often refers to these countries as PIIGS) and virtue of the centre countries does not correspond to what actually occurred.

For those that believe that the public debt problem in the periphery countries was worsened by Euro membership let’s compare what happened in Euro countries to what occurred in Iceland and UK (which are not members of the Euro) after the Great Recession. Between 2007 and 2010 Greece’s debt increased from 106% of GDP to 148%. In the same period, Iceland’s debt increased from 23% of GDP to 81%. In Portugal debt increased from 67% to 88% and in the UK from 43% to 86%. Such facts make it hard to argue, that public debt in periphery countries would be better, if they were outside of the Euro.

Another commonly held opinion is that the creation of the Euro led to a too large increase in credit in the periphery countries of the Euro resulting in speculative bubbles in their housing markets (and therefore magnifying the effects of the Great Recession). The graph below (Figure 1) allows us to examine if such opinion is true (unfortunately the index does not include data for Greece, Iceland or Portugal):


Figure 1: Housing Price Index
Figure 1

The graph clearly shows that at the end of the 20th century and start of the 21st century there was a significant increase of house prices in all of the countries considered (apart from Germany) followed by a fall after the Great Recession. The pattern however is the same for periphery countries like Spain and Ireland and for centre countries like France and the Netherlands. The pattern is also the same for countries that were not Euro members (USA, UK and New Zealand). Does it make sense to blame the Euro for the price rises in housing in Spain and Ireland? If so, why not blame the dollar or the pound for the same having happened in the USA and UK?


Figure 2: Unit Labour Costs
Figure 2

Another common explanation for the current plight of the Euro periphery countries is that these have lost competitiveness relative to the centre. Figure 2 (above) shows the evolution of unit labor costs for several countries. One can see that the periphery countries have clearly lost competitiveness relative to Germany that maintained its labour costs nearly constant. However, one can also see that the evolution of labour costs in these countries was similar to what happened in Euro centre countries such as France and Netherlands and to countries which aren’t members of the Euro like the USA, UK and Iceland. Curiously Iceland was the country that lost more competitiveness relative to Germany since 1999. These facts make it hard for me to see the Euro as the cause of loss of competitiveness relative to Germany or for the current problems the periphery faces.

We have seen how untrue the image of immoral behavior on the part of periphery governments is (which unfortunately has contributed to make the inhabitants of centre countries think that the periphery citizens aren’t worthy of solidarity from centre governments) but what about the image that the Euro is an institution that benefited mostly the centre? To answer this let’s look at table 2 which shows the average growth rates before and after the creation of the Euro (the numbers for Greece would be similar if we were to consider instead the periods 1992-2000 and 2001-2007):


Table 2: Average GDP growth rates in percentage
Table 2

One can see that prior to the Great Recession only three Euro members grew less than before adopting the Euro (Netherlands, Ireland and Portugal) but most (Germany, Spain, France, Greece and Italy) grew more. Could this have been merely the result that those years were better for the world economy in general? Apparently no, for in the same period the UK grew at a slightly lower rate and the US at a substantially lower rate. The good performance of the centre relative to the periphery only occurs after the Great Recession. Could the Euro be responsible for this? I think the facts also contradict this idea. Among the countries which suffered the most since the beginning of the Great Recession one finds Euro members, such as Greece and Ireland but also Iceland, which does not belong to the eurozone. Among other countries which have also suffered significantly with the Great Recession one finds Euro members such as Spain, Italy and Portugal but also the UK which has its own currency. Therefore it seems to me also a myth the belief that the Euro has benefited the centre more than the periphery or that it has been one of the main factors behind the severe economic crisis which the periphery countries have experienced in recent years (unfortunately this myth has contributed to a feeling of antagonism of periphery citizens towards centre countries).


João Madeira

University of Exeter



Data for tables 1, 2 and figures 2 can be obtained from the OECD website:

Data for figure 1 can be found at the FRB Dallas website:

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