Paul Krugman's new post should put an end to any argument that Europe's debt crisis was caused by government spending:
Blue line = Germany public debt as % of GDP
Red line = Spain public debt as % of GDP (yes I know the chart above doesn't say 'public' but that's what it is)
Spain, like Ireland and Iceland, served a model of fiscal conservatism for years. Each of these countries ran steady and size-able budget surpluses year after year. In contrast, the German government mostly ran deficits. Yet today Germany is the island of safety in a sea of worry.
If government spending can't explain the crisis, what can? The following table should complete the circle.
Source: IMF World Economic Outlook Database, April 2010
This is a table of The Current Account as a Percentage of GDP for selected developed countries from 2006 to 2009. A positive number means the country ran a current account surplus that year. In other words, it sold more to other countries than it imported from them. A negative number means that it imported more from abroad than it sold to other countries and consumed the difference.
Countries can run a current account deficit even if the government budget is in surplus if the private sector external debt is growing too fast. And that is exactly what happened in Spain, Iceland, and Ireland, and it is also a big part of the story in Greece and Portugal. (Notably, Iceland, which had the largest current account deficit, at 25%, at the start of this period, blew up first and now runs a surplus by devaluing its currency).
I have ordered the table by 2009 values from worst to best, and at the top of the list, in order are Greece, Portugal, Spain, Italy, and Ireland (excluding Australia and New Zealand). In other words, among major euro zone nations which are all included in the table, you could have predicted the precise stress points of the 2010 euro crisis by looking at the 2009 current account figures.