Booze, Women and a Serious Point About the Euro Zone

But the Dutch minister was making a more serious point about the dangers of free-spending and a lack of fiscal responsibility.

No sugar-coating his views.

Photographer: Jasper Juinen/Bloomberg via Getty Images

As head of the Eurogroup, outgoing Dutch Finance Minister Jeroen Dijsselbloem, presided over the European Union's attempts to resolve the common currency area's financial crisis. He's now being accused of racism, sexism and generally missing a good chance to keep mum for his comment on the lessons of that experience.

Dijsselbloem could have chosen his words better, of course. He seemed to take aim at pretty much every European south of the River Seine when, referring to Europe's Mediterranean members, he told the German daily Frankfurter Allgemeine Zeitung "I cannot spend all my money on booze and women and then ask you for support." The indignant reaction to the remark highlights well-known euro zone divisions. But, caricatures aside, the Dutch minister was making a more serious point about choices in public spending. The context was what made the remark controversial: Dijsselbloem was talking about European nations showing solidarity for their less fortunate neighbors. He made the point that though solidarity was important to him as a Social Democrat, responsibility was too. 

Dijsselbloem is in a difficult political situation: His Labor Party did badly in this month's Dutch election, and he will probably be out of a job once long coalition talks are over. Since the Eurogroup is an informal gathering of finance ministers, it's unlikely that he'll head it after January, 2018, when his four-year term runs out.

There has been speculation that Dijsselbloem might be looking to turn the job into a permanent one or looking for a similar appointment at the EU level with the support of austerity-loving Germans such as Finance Minister Wolfgang Schaeuble. If that's his intention, however, his turn of phrase has only complicated things. Portuguese Prime Minister Antonio Costa called the remark "racist, xenophobic and sexist." Former Italian Prime Minister Matteo Renzi wrote on Facebook that it was a "stupid joke" and called for the Dutchman's resignation. Spanish deputies in the European Parliament backed the call.

The orthodoxy for many in southern Europe is that the crisis was mainly caused by the construction of the euro area. The single currency benefited Germany, which used it to expand exports and lending to the less financially stable countries of southern Europe. These countries are often described as innocent victims of the German expansion, unable to increase their competitiveness and fix their external account deficits, flooded with frivolously lent German money. They are seen almost as kids tempted -- and shaken down -- by an older, stronger neighborhood gang leader.

Reality is more complicated. In the run-up to the crisis, Spain, Italy and Portugal saw credit to the private sector from domestic banks reach or exceed their economic output:

Drowning in Money

Credit from domestic banks to the private sector relative to GDP, percent

Source: World Bank

Yet, among the three countries, only Portugal used the credit boom to boost labor productivity at the same rate Germany was doing it:

A Wasted Opportunity

Labor productivity of the total economy, index

Source: OECD

A lot of the money pumped into southern Europe, thanks to the low interest rates they enjoyed after the common currency was introduced, went into real estate bubbles, which didn't help future productivity growth. The illusion of prosperity masked a growing competitiveness gap. 

At the same time, governments celebrated growing tax revenue, a direct result of the bubbles. "These large-scale revenue windfalls were only partially used to improve fiscal positions, with the balance paid out in terms of extra public spending or tax cuts," Philip Lane of Trinity College Dublin (now the Irish Central Bank governor) wrote in a 2012 analysis of the euro crisis' root causes. 

This is the story of a wasted opportunity. Southern European companies and governments could have used the carefree years after the introduction of the euro, when interest rates converged to a low level, to create a buffer against future crises. They failed to do so.

Dijsselbloem is not known for holding back his views: He once described his predecessor at the Eurogroup, Jean-Claude Juncker as a "heavy smoker and drinker." His "booze and women" description was insulting, but it was also largely on point. Italian politicians, who have failed to stimulate productivity growth even after the crisis, shouldn't take offense.

Costa's anger, and the more restrained negative reaction of Spanish Finance Minister Luis de Guindos, is somewhat more justified. The Portuguese private sector did its best to increase productivity, and the Spanish government ran a budget surplus between 2005 and 2007. Yet that wasn't enough to insulate the two countries from the effects of the global crisis. Their post-crisis success may be a reason to resent Dijsselbloem's bluntness -- but the action they took to achieve it is exactly the kind of action of which he approves.

The euro zone is not foolproof. Without a common government or a common budget, the single currency  leaves a lot of individual responsibility to its member states. Crises are inevitable if they don't fully recognize it. There's nothing wrong with drawing people's attention to this fact.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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