What caused the eurozone crisis?

The eurozone leaders have agreed new fiscal rules, insisted on by Germany, that will limit their governments' borrowing each year to just 3% of their economies. These rules should stop the massive accumulation of debt and make sure there won't be another financial crisis.

But, they agreed to exactly the same 3% borrowing limit back in 1997, when the euro was getting ready. The "stability and growth pact" was insisted on by German finance minister Theo Waigel. So, what happened?

Italy was the worst offender. It usually broke the 3% annual limit. But actually Germany was the first big country to break the 3% rule. After that, France followed them. Of the big economies, only Spain carried out with its duty until the 2008 financial crisis; the spanish government stayed within the 3% limit every year from the euro's creation in 1999 until 2007. Not only that; of the big four, Spain's government also has the smallest debt in relation with the size of its economy. Greece, by the way, never fulfilled to the 3% target, but manipulated its borrowing statistics to look good, which allowed it to get into the euro. This irregularities were discovered two years ago.

But the markets have other ideas. So Germany, France and Italy should be in trouble with all that reckless borrowing. Well, no. Actually, markets have been willing to lend money to Germany at low interest rates since the crisis began. Spain on the other hand is seen by markets as almost as risky as Italy.

So what caused the crisis? There was a big accumulation of debt in Spain and Italy before 2008, but it had nothing to do with governments. Instead it was the private sector who were taking out loans. Interest rates had fallen to unprecedented lows in southern European countries when they joined the euro. It motivated the increase of the debt.

All that debt helped finance more and more imports by Spain, Italy and France. Meanwhile, Germany became an export industry since 1999, selling more to the rest of the world than it was buying as imports. That meant Germany was earning a lot of surplus cash on its exports and most of that cash ended being lent to southern Europe. But debts are only part of the problem in Italy and Spain. During the boom years, wages rose in the south and German unions agreed to hold their wages steady. So Italian and Spanish workers now face a huge competitive price disadvantage.

So to recap, government public debt, which has grown exaggeratedly since the 2008 financial crisis, had very little to do with creating the current eurozone crisis in the first place, especially in Spain. Spain and Italy are now facing nasty recessions, because no-one wants to spend. Exports are uncompetitive and, now, governments have agreed to drastically cut their expenses.

Xabier