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Special Report
Truth, Lies, and Euros
A truly amazing pattern of lying about public spending and debt — can the U.S. be far behind?
As Europe’s financial crisis worsens, it’s increasingly apparent that the economic woes of countries like Portugal, Spain, and Greece have resulted from more than just bad policy. With each passing day, evidence mounts that one dynamic driving the crisis is that of untruth: a disturbing European pattern of fabrication about levels of public spending and debt.
The latest proof for this thesis is the discovery by newly-elected Spanish regional and local governments of concealed debts run up by their predecessors. This contradicts claims by Spain’s Socialist Finance Minister, Elena Salgado, that Spain’s regions had no “hidden deficits” on their accounts. Spain’s business community, however, has long complained about local governments pressuring private companies to do business with them “off the books.”
One reason for such behavior is that Spain’s government knows that the greater Spain’s real overall-public debt, the higher will be the interest-rates demanded by financial markets and the more stringent will be the conditions attached to any “financial assistance package” (i.e., bailout) that Spain might, like Portugal and Greece, eventually need.
Unfortunately, financial sleight-of-hand in today’s EU has a longer history than the present turmoil. It’s characterized the entire monetary union project from the start.
In the 1990s, European governments agreed the single currency’s success would depend upon countries entering the eurozone on a solid financial basis and then remaining on a firm footing. To that end, both the 1992 Maastricht Treaty and the 1997 Stability and Growth Pact (SGP) established strict criteria concerning public spending for countries admitted to the single currency.
One such standard concerned the ratio of an applicant country’ gross government debt to GDP. It was not to exceed 60 percent at the end of the preceding fiscal year. Maastricht’s convergence criteria also specified that the ratio of the annual government deficit to GDP should not exceed 3 percent of the same fiscal period
If this wasn’t enough, the SGP identified conditions that eurozone members had to continue meeting if they wanted to avoid Brussels-imposed disciplinary measures.
The concern was that countries with a reputation for fiscal irresponsibility (e.g., Greece) might use their euro-membership to indulge in ever-greater spending, having rather cynically calculated that maintaining the euro’s credibility would require richer, more-fiscally responsible members (i.e., Germany) to bail them out if they got into financial trouble.
Yet from the very beginning, many euro applicants were allowed to get away with “creative accounting” to meet the conditions of Maastricht.
Several governments with heavy welfare expenditures moved parts of their finances into “off-budget” arrangements such as pseudo-private but essentially state-owned corporations. This permitted them to technically reduce their spending to get close to Maastricht convergence criteria, while actually maintaining spending-levels.
Speaking about his own country in 2010, one Portuguese politician noted: “The state has for many years been removing from the budget a series of activities, which has made a large part of our numbers fictitious.” He then estimated that Portugal’s true total public debt stood as high as 112 percent of GDP, instead of the 82 percent claimed by the government.
Another country simply lied about its finances. In 2004, Greece’s then-finance minister George Alogoskoufis confessed: “It has been proven that Greece’s budget deficit never fell below [the required] 3 percent since 1999.”
Such obfuscation by national governments was matched at the EU-level. Several countries that didn’t even come close to meeting Maastricht’s convergence criteria were given generous waivers (thereby negating the convergence criteria’s entire purpose).
In the end, most countries were admitted to the euro despite having debt levels exceeding 60 percent. Italy and Belgium, for example, were permitted entry despite having debt ratios of over 120 percent.
Rather, however, than insist that such countries henceforth adhere to the SGP, EU officialdom moved swiftly to discredit it. Within six months of the euro’s entry into circulation, then-European Commission President Romano Prodi labeled the SGP the “Stupidity Pact.” It was, he said, “too rigid” and should not be enforced “dogmatically.”
About the Author
Samuel Gregg is Research Director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, Wilhelm Röpke’s Political Economy, and, most recently, Becoming Europe: Economic Decline, Culture, and America’s Future.
Letter to the Editor View all comments (17) | Leave a comment
More Articles by Samuel Gregg
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emily lee | 6.8.11 @ 7:23AM
good job...
martin j smith| 6.8.11 @ 7:31AM
Nothing new here. But we have Our Obama--our own liar in chief. I believe that for me a litmus test for ANY PRESIDENTIAL CANDIDATE in this country will be thats/he con only calls Obama an his POLICIES but HOW CLOSE S/HE COMES TO CALLING OABMA A LIAR OUTRIGHT!!!!!!!!!!!!!!!!!!. There has been and will be many opportunities to do so.
One other thing; PERHAPS THERE SHOULKD BE AN INVESTIGATION AS TO WHICH IF ANY POLITICAL FIGURES ARE COORDINATING US POLICIES WITH THE EU. It does not seem to be an accident that we and they are going down the same bad road together.
Dan Hirsch| 6.8.11 @ 8:41AM
Quoting here: "Several governments with heavy welfare expenditures moved parts of their finances into "off-budget" arrangements such as pseudo-private but essentially state-owned corporations."
Can you say "Freddie Mac", "Fannie Mae", "General Government Motors?"
I think we are going to need a party that's operating on something even stronger than TEA!
And our little President and his little academicians are not even close to getting anywhere near the right answer.
Let's get busy, people! Freedom ain't free!
Tom| 6.8.11 @ 9:02AM
Note yesterday's article in USA Today regarding the true extent of U.S. debt when one calculates unfunded liabilities -- something north of $500k per household.
Also, could the Federal Reserves decision a few years ago to stop releasing a key money supply figure (was it M1 or M2?) have any relevance???
Melvin| 6.8.11 @ 9:06AM
I guess some Euro made a miscalculation along the way.
C Smith| 6.8.11 @ 9:43AM
"... if any would not work, neither should he eat." (2 Thessalonians 3:10).
Merlin| 6.8.11 @ 9:55AM
Are there politicians anywhere who are not short-sighted, irresponsible morons?
Is there anything more irresponsible than spending money you do not have year after year after year?
Thank GOD for the tea party.
Redstateboy| 6.8.11 @ 12:46PM
lemme see if I get this straight.. the European Union - led by Liber-uls and they Lie.. let's alert the Media.
shipley130| 6.8.11 @ 1:53PM
We need to round up all the past and present socialist leaders and give them a nice sea burial.
mmercier| 6.8.11 @ 3:46PM
Lies destroy the ability of the honest to maintain faith in leadreship. This is a necessary prequisite to destroy order within a civil population.
Guess what comes next.
megapotamus| 6.8.11 @ 4:59PM
Prodi labeled the SGP the "Stupidity Pact." It was, he said, "too rigid" and should not be enforced "dogmatically."
Yeah, these guys are dead set against dogma. I recall that Prodi was supposed to be a rather ruthless pragmatist... even a rightwinger. That didn't extend to fiscal matters I guess or perhaps that was just a smokescreen from the beginning. The Economist will have much financial blood on its hands if/when the EU hits the fan. Those douches.
rendite| 6.9.11 @ 2:08AM
Greece (in still more trouble in the next 4 weeks), Portugal, and Spain are named here as Eurozone problems -- why did the author leave out Ireland?
I cannot ever imagine lashing my country's economic well-being to the above named countries or any of the others in the Eurozone.
So, of the many lessons here, one is: NEVER unite oneself with others for governance. Hence, no UN, no pan-world global order government.
I mean, Portugal is bad. It is a basket case. Greece is worse. But they are paragons of fiscal virtue compared with all African nations, Latin America, South America, Asia....
Johnny| 6.9.11 @ 6:18AM
This, although not shocking, should be a wake up call for the US. People do not realize it yet but we are already in the same boat with the rest of the world. Everyone is waiting for our economy to recover but the news flash here is that it will not return to where it was post "recession", ever. Our former standard of living is gone. We cannot expect to ever get back to it because the world can support it no longer. This will be a very hard pill for the hard working sector of our country but even harder on the welfare leeches and baby factories that refuse to hit a lick at a snake. Maybe this will be the only consolation to the working folks but it's going to be hard to watch.
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notvanilla| 6.12.11 @ 10:34AM
Socialism mentality. You can spend all day long, someone else will pay for it. Russia showed everyone that it works - until it crashes. Let Europe fail it's the best lesson. Hard as it seems on the surface, the toughest lessons leave the most impression.
insanity | 6.13.11 @ 11:00AM
good to hear that