Has the European Crisis been about the Welfare State?

Yes, according Fredrik Erixon, director of an independent think tank in Brussels, the European Centre for International Political Economy.

At the Bloomberg Mr. Erixon writes (hat tip Dan Mitchell)

When it comes to overspending on social welfare, though, Europe has no angels.

Even the “good” Scandinavians, and governments that appeared to be in sound fiscal shape in 2008, but were then undone by unsustainable private-sector debts, were spending too much and will have to restructure. The only question is whether this will be done gradually, or via shock therapy.

Take the four countries at the epicenter of the euro-area crisis: Greece, Ireland, Portugal and Spain. They are in many ways different, but they have three important characteristics in common.

First, total debt in these countries expanded rapidly throughout the past decade -- either because of increased government borrowing (Greece and Portugal) or through a rapid buildup of private debt (Ireland and Spain). Second, they all ran substantial current-account deficits in the years before the crisis. Third, government spending in those nations grew at remarkably high rates. In Greece and Spain, nominal spending by the state increased 50 percent to 55 percent in the five years before the crisis started, according to my calculations based on government data. In Portugal, public expenditure rose 35 percent; in Ireland, almost 75 percent. No other country in Western Europe came close to these rates.

Clearly, the welfare-state expansion in Greece and Portugal was part of the reason these two countries ended up as clients of Europe’s bailout mechanisms. But Ireland and Spain had problems with the rapid expansion of the state, too. A big part of rising affluence during the boom years was generated by escalating real-estate bubbles, which caused private debt to soar. They boosted the construction sectors and, more generally, pushed domestic consumption to the point where Spain had to borrow as much as 8 percent of gross domestic product every year to finance its current account deficit. Like other bubbles, they spearheaded economic growth, which allowed governments to expand the state rapidly.

Read the rest here.

Bottom line is that today’s euro crisis represents the cumulative impact of intertwined government policy failures.

This includes monetary ‘bubble’ policies, which pumped up malinvestments and incentivized state profligacy, as well as, increased political centralization through webs of regulations which resulted to the lack of competitiveness (most pronounced in the labor markets), and the unsustainable social welfare systems (which also had been boosted by the bubble).