We had an entire “foreign policy” debate last night without one mention of the Eurozone, as if this has not been the main headwind for the global economy over the past year. There’s a fallacious belief that the crisis has eased, relating this to the reduction in budget deficits throughout the membership, as if reducing deficits can stop the crisis, which includes recession and even depression conditions in many of the member states. Even the focus on deficits in a vacuum leaves out key information; the reduction to 4.1% of GDP came about mostly from a sharp reduction in Ireland and the biggest country, Germany, keeping their deficit to 0.8% of GDP. And public debt rose as a percentage of GDP while deficits fell, which shows that the real problem is the shrinking GDP.

The Eurozone remains in recession, including in countries like Spain, already suffering under an eye-popping 24% unemployment. But despite the human toll that a contracting economy creates, the big problem Spain’s central bank identifies is the potential for Spain missing their deficit target:

The euro zone’s fourth-largest economy contracted by 0.4%, the same as in the second quarter, the Bank of Spain said in a quarterly report. On an annual basis, the contraction was 1.7%, compared with a 1.3% drop in the second quarter, the bank added.

The central bank’s report showed only limited reasons for optimism, as the country is in the fifth year of a property bust and is cutting down spending to meet tough deficit targets. The most positive news in its report, a small pickup in consumer spending in the third quarter, was explained as the result of consumer sales brought forward to avoid a value-added tax increase effective from September […]

The central bank said that “it can’t be ruled out” that the government would miss its EU-mandated budget deficit target for this year, echoing a recent warning made by the bank’s governor, Luis María Linde.

The government has said its deficit will be 7.4% of GDP this year, due to anticipated spending tied to the government’s requested €100 billion ($131 billion) bailout of the country’s banks underwritten by the European Union. When excluding that one-time outlay, the government believes that the designated 6.3% target can still be met. The government anticipates some leniency from the EU on the matter because it argues the bank injections are a nonrecurring expense. Last year Spain’s budget deficit was 9.4% of GDP.

These artificial deficit targets are really not the issue. You have a quarter of the country out of work, and since those purchases brought forward will result in a crash in the next quarter, the worst is yet to come. Spain has pretty much no pressure from the debt markets, and no need to adhere to more austerity conditions with a bailout. Yet everyone has put on the green eyeshades and become accountants, while the public suffers.

We see the same dynamic in Greece, which has experienced 18% contraction in its economy over the past four years, easily enough to put them in depression territory. Their public debt has increased despite austerity, just like the rest of the Eurozone.

The problem is that Europe’s solutions risk a lost decade of economic contraction or zero-growth, at great cost to the populations of the member countries. Yet still the elites count deficit-to-GDP ratios.

David Dayen

David Dayen