Eurocrisis: Exposing Myths to Find Solutions

By  John D. Stephens 

Beginning in 2008 and deepening in 2011 and 2012, five countries in the European periphery—Portugal, Ireland, Greece, Spain (unflatteringly known as the PIGS)—and, to a lesser extent, Italy, experienced deep economic crisis. All five countries are members of the Euro area, known as the Eurozone. That they share a common currency is both one source of their crises and a block to one solution. The crisis was (and is) deepest in Greece, as government budget deficits reached 16% of gross domestic product in 2009 and total government debt climbed to 134% of GDP the same year, well beyond the limits prescribed by the European Union Stability and Growth Pact (SGP).

Myths and Real Causes 

As a condition for bailing out the Greek government with loans, the International Monetary Fund and the European Central Bank forced it to slash government spending and government employment and sell off government enterprises, such as ports. Northern European members of the Eurozone (Austria, Germany, Benelux, and the Nordic countries), led by Germany, backed this austerity, but this “solution” was based on the assumption that the 
cause of the crisis was profligate government spending. Indeed, this claim that excessive social welfare spending was the root cause of the problem was echoed in the international financial press. It is a false analysis.

There is no question that the Greeks were living beyond their means. In the three years prior to the 2008 crisis, Greek government deficits averaged 6% of GDP, double the SGP limits, while government debt averaged 115%, almost double the 60% limit prescribed in the SGP. By contrast, the Spanish and Irish governments ran budget surpluses in those years, and their total government debt was well below the SGP limit. Moreover, the Nordic countries—Sweden, Denmark, and Finland—who are three of the only four EU members that have never breached the SGP, are the really big welfare spenders in the European Union. Thus, it is a myth that excessive welfare spending is the root cause of the Eurocrisis. 

What, then, are the causes of the crisis? The first is the financial crisis in the United States, which spread to Europe because of open financial markets. In the first three decades after the Second World War, the so-called “golden age” of growth, many advanced industrial countries limited cross-border financial flows, in such ways as capping the amount of money that could be taken out of a country or limiting the purchase of stocks by foreigners. These capital controls were gradually eliminated in the 1970s and 1980s. In the years prior to the crisis, the housing and construction sectors in Ireland and Spain were booming, and foreign funds flowed into those countries. This led to a huge buildup of private debt. Spanish and Irish banks borrowed abroad to invest in booming housing and construction. When the bubble burst, the banks were left holding a mountain of debt that they did not have the resources to cover, not only in residential housing but also in commercial building and real estate. Many banks in both countries failed, and the governments were forced to bail out the banks. Government debt then soared, especially in Ireland. Thus, speculative investment and bad decisions by private investors were a second component of the crisis. 

Third, the low-interest-rate policy of the European Central Bank fueled overheating of the economies of Spain, Greece, and Ireland. This policy was appropriate only for the core of the EU—Germany and France—which had very low growth rates early in the decade. Overheating pushed up wage rates in the construction sector, which spilled over into the rest of the domestic economy, making manufacturing wages internationally uncompetitive. The normal corrective for such a situation is devaluation, which lowers domestic labor costs by lowering the value of the national currency. Such a solution was and is impossible because Spain, Greece, and Ireland are part of the Euro area.

Finally, the Eurozone is not what economists term an “Optimal Currency Area” (OCA), an area in which it makes sense to have one currency. Economic cycles are not synchronized across the Eurozone as they are in an OCA, making macroeconomic policy appropriate for some of its members but inappropriate for others. 

For comparison, the United States is also not an OCA, but the American political economy has other features that make up for it. First, labor mobility is high, so that workers move from depressed regions to booming regions. This does not happen in the Eurozone, despite radical differences in unemployment levels and the absence of legal barriers to labor mobility. In 2011, youth unemployment was 44% in Spain and under 10% in Austria, Germany, and the Netherlands, yet there was no significant movement of Spanish youth to these countries. Second, in the United States, the tax system, social security, and unemployment compensation systems act as automatic stabilizers in that more income, social security, and Medicare taxes are collected from the booming states and more unemployment, welfare, and food stamp transfers are paid out in the depressed states. Despite the fact that U.S. social policy is miserly, these transfers are significant, whereas no such transfers exist in the EU. Indeed, one long-term solution for the Eurocrisis is to create such transfers. The proposals are not for common social policy but for low-interest loans that depressed countries could draw on.


In the meantime, the northern European countries, led by Germany, continue to push austerity for the crisis-ridden countries. Austerity can work for the northern European countries, which generally run trade surpluses and can export their way out of economic recessions, but it is not a solution for the European periphery (other than Ireland), because these countries usually run trade deficits. They must recover on the basis of demand generated domestically, and this requires increasing government spending, which violates the current SGP limits and, without left-wing governments in power, is not even on the agenda. The truth is that the biggest beneficiaries of the Eurozone have been the northern European exporting countries, because the common currency prevents appreciation of their currencies, which, before introduction of the Euro, would have undermined their competitive situation. Political leaders in northern Europe know this, but do not acknowledge it to their electorates. It is understandable that the northern Europeans are reluctant to bail out Greece, a country riddled by corruption, pork-barrel politics, and bad economic management. Spain, by contrast, is a well-governed political economy that deserves the help of those who have benefited from the Eurozone economic arrangements.

John_Stephens2.jpgJohn D. Stephens is a professor of political science and director of European studies at the University of North Carolina at Chapel Hill. He is the author or co-author of five books, including Development and Crisis of the Welfare State (2001) and Democracy and the Left:  Social Policy and Inequality in Latin America (2012), both co-authored with Evelyne Huber.

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Grassroots Fundraising: Paying for the Revolution (9pm Eastern)

June 23, 2017
· 46 rsvps

Are you new to socialist organizing? Or after many years do you still struggle, raising money from members when you need it but without a steady flow of income or budget to plan ahead? Are you afraid to tackle fundraising because it seems so daunting or you are uncomfortable asking people for money?

In this webinar, you will learn why fundraising is organizing, and how to do it – face to face, through fundraising events, and other ideas.

Join us for our latest organizing training for democratic socialist activists: DSA’s (Virtual) Little Red Schoolhouse.


  • Steve Max, DSA Vice Chair and one of the founders of the legendary community organizing school, The Midwest Academy

Training Details:

  1. Workshops are free for any DSA member in good standing.
  2. You need a computer with good internet access.
  3. Your computer must have preferably headphones or else speakers; you can speak thru a mic or use chat to "speak".
  4. If you have questions, contact Theresa Alt
  5. If you have very technical questions, contact Tony Schmitt 608-355-6568.
  6. Participation requires that you register at least 21 hours in advance -- by midnight Thursday for Friday's webinar.

NOTE: This training is scheduled for 9:00pm Eastern Time (8pm Central, 7pm Mountain, 6pm Pacific, 5 pm Alaska, 3 pm Hawaii).

Data Security for DSA Members

June 27, 2017

Ack! I googled myself and didn't like what I found!

WHAT: A DSA Webinar about "Doxing"

We're proud of our organizing, and chapter work is transparent for both political and practical reasons. However, there are basic precautions you can take in this time of rapid DSA growth to protect your privacy.

Key Wiki is a website that meticulously documents DSA activity and posts it for the world to see. If you're an active DSA member, likely your name is on their website. This is an example of "doxing".

As DSA becomes larger, more visible, and more powerful, we might expect that more websites like this will pop up, and more of our members' information might be posted publicly on the web.

Join a live webinar on Tuesday, June 27 with data security expert Alison Macrina, to learn:

  1. what is doxing? with examples and ways to prevent it
  2. how to keep your passwords strong and your data secure
  3. where to find your personal info on the internet and how to get it removed
  4. social media best practices for DSA organizers
  5. what to do if you've already been doxed

Zoom Link:

Call-in Info: +1 408 638 0968
Meeting ID: 917 327 6528

Film Discussion: Pride

September 10, 2017
· 11 rsvps

Join DSA members Eric Brasure and Brendan Hamill to discuss the British film Pride (2014). It’s 1984, British coal miners are on strike, and a group of gays and lesbians in London bring the queer community together to support the miners in their fight. Based on the true story of Lesbians and Gays Support the Miners. The film is available for rent on YouTube, Amazon, and iTunes. 8 ET/7 CT/6 MT/5 PT.

Film Discussion: Union Maids

September 24, 2017
· 8 rsvps


Join DSA member and labor historian Susan Hirsch in discussing Union Maids (1976). Nominated for an Academy Award, this documentary follows three Chicago labor organizers (Kate Hyndman, Stella Nowicki, and Sylvia Woods) active beginning in the 1930s. The filmmakers were members of the New American Movement (a precursor of DSA), and the late Vicki Starr (aka Stella Nowicki) was a longtime member of Chicago DSA and the Chicago Women's Liberation Union. It’s available free on YouTube, though sound quality is poor. 8ET/7CT/6MT/5PT.