So, was it the size of the welfare state, as the American Right likes to argue?
Swing and a miss, Germany has a bigger welfare state as a percentage of GDP than any of the GIPSI nations and it doesn't have a debt crisis on its hands. So was it high budget deficits, like the Germans say?
To the extent that this is true, it only really applies to Greece. Italy's deficits are barely higher than France's, Portugal had lower deficits than Germany, and Ireland and Spain ran surpluses. So that's not a good fit either. How about flows of capital from the wealthier northern countries to those in the south, like Krugman and others argue?
Now we're cookin'. I know I'm effectively paraphrasing Krugman's argument about the Eurozone, but I happen to agree with it, so there's that. In any case, my point in explaining this is that this new EU fiscal pact is yet another mistake made by Eurozone leaders who have turned this into a story about fiscal discipline, when the real story is one of capital flows from northern to southern Europe. In short, here's what happened: creating the Euro created a false sense of security among investors, which led to unsustainable flows of money in the form of private investment to go into southern countries. As prices and inflation rose, their goods became less and less competitive on the world market, so they started running huge trade deficits. Then the recession hit and the housing bubble burst. Poof, private investment took a dive off a cliff, and countries were forced to run massive deficits to keep the recession from getting deeper, which is what any economist would argue needed to happen. Since the ECB raised interest rates last spring, weak economies took a nosedive and Greek bond yields spiked, and investors flew into a blind panic as they realized that the ECB wouldn't pursue policies conducive to growth in anywhere but Germany.
Instead of addressing the problem of huge trade deficits and price levels, the Germans are insisting upon keeping inflation very low with unemployment at intolerably high levels. The ECB has slowly begun infusing more cash into the Eurozone and continues its bond-buying programs, but the policies are halfheartedly pursued, at best. What the ECB needs to do is print a boatload of cash and infuse it into the Eurozone, the Germans need to accept a higher rate of inflation, so that southern countries with weaker economies don't have crippling deflation (which increases debt levels) and can slowly begin to balance their trade and current account books. Instead, the Germans, forever scarred by Weimar Republic hyperinflation, are pushing for dangerously low levels of inflation. At the same time, they're insisting that harsh austerity measures be taken by not only GIPSI nations, but by everyone! They argue that GIPSI nations will recover by running huge trade surpluses, but who are they going to trade with if everyone in the Eurozone is forced to cut back by a treaty like this one? Contrary to what Angela Merkel and company may think, when you spend less money, fewer, not more, things are bought.
How's all that austerity treating them, you may ask? The EU just was officially declared to be in another recession. So this new fiscal pact represents yet another step down the road to ruin for the Eurozone. If monetary policy in Europe, as we've seen, is pursued primarily to benefit the Germans and ruin everyone else, how the hell will locking everyone's fiscal policies up in a similarly Germanic manner help? The short answer is this: it won't.