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."
It's also now clear that many member-states had no intention of playing by SGP rules once officially in the club. By 2005, five of the then-12 eurozone countries had or were planning deficits above 3 percent. Seven of them had debt-to-GDP ratios above 60 percent; two had debt ratios above 100 percent of GDP.
Again, the EU's response was to formalize the fudging. In 2005, the European Council "suspended" the SGP and sought to create a new pact. This maintained the previous rules about debt, but added many exceptions for types of spending that would not be included when determining debt and deficit figures.
The "excluded-spending" embraced expenditures on research, defense, education, aid and (if that wasn't enough) the greatest catch-all of them all: anything spent in the interests of "the unification of Europe."
None of this, however, could not change the reality that spending on big-budget items such as education and defense does count when anyone -- including lenders -- decides to assess the true state of a government's public finances.
In a June 2 speech this year, the European Central Bank's outgoing President, Jean-Claude Trichet, made an impassioned plea to renew the European unification project on the basis of Europe's "spiritual form" and institutions that preserve Europe's "core values."
Trichet himself has done much to restrain Europe's governments from digging themselves into deeper fiscal holes. But if Europe's political class truly believes many of the EU's economic problems are symptomatic of a deeper crisis, then renewal must involve acknowledging the half-truths and post-facto rationalizations that have long haunted many EU states' public finances.
Few "core values" would have a more bracing effect upon Europe's current economic problems than their governments embracing honesty, transparency, and accountability. No doubt many a European political-career would be terminated as a result. The alternative, however, is for Europe's governments to continue the charade about the real state of their finances.
Morally and financially, that's not an option at all.
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