Spain isn’t Different

Spain is in need of urgent repair – FT.com.

The writer of this piece believes that all Spain needs is some central bank easing to straighten everything out following the “This Time is Different” narrative that has become popular among the financial press recently.

He first mentions that Spain’s problem is not competitiveness and uses improving productivity and a shrinking trade deficit to prove his point. He is analyzing this data incorrectly, so he comes to the wrong conclusion.

This chart shows Spain’s productivity since 2007:

Spain Productivity

This is Spain’s current account deficit since 2007:

Historical Data Chart

True, they both have improved. Since the author does not ascertain why this improvement has taken place he mistakenly concludes that Spain requires monetary easing. In actuality, these improvements are a mirage, and the old explanation that Spain is uncompetitive is correct.

This chart is Spain’s unemployment rate over the same time period:

Spain Unemployment Rate

Note how it slopes upward in roughly the same trajectory as gains in the current account and productivity.

The reason that these numbers have improved in Spain is because of the increasing unemployment rate. Spanish consumers have less money to spend, and this has tamped down the consumption of imported goods. Additionally, less productive workers leaving the ranks of the employed have raised the average productivity of the remaining workers.

Spain’s deficit is not improving, as the author states. Again, high unemployment is the primary cause sapping the country of needed revenue:

Spain Government Budget

As we say in the United States, the more things change, the more they stay the same.

What has really happened here?

In a nutshell, Spain and the periphery received a lower interest rate than their economic fundamentals warranted. This low rate was an easy money policy that fed wage inflation and a housing bubble in Spain, created an Irish banking crisis and caused Greece to borrow much more money than it should have, a government debt bubble so to speak.

When these bubbles burst, these countries then received a much higher rate of interest than they needed in order to keep inflation low in the north. This tight money policy drove them into deep recessions or even depressions.

Spain’s largest trading partner is the EU where it does 70% of its foreign trade. That large number is not an anomaly; Europe primarily trades with each other.

Paradoxically, these close economies argue not for a shared currency but for different national ones. The periodic devaluations of these currencies over time kept evened out the competitive advantages of the north and slowly devalued the real price of debt.

By adopting a single currency, these pressures built up over time until they began tearing the Eurozone apart in the wake of the GFC.

There are only two ways for Spain to resume growing its economy. The first is a de jure default on its debt so that it could start from scratch. The second is a de facto default by adopting its dormant national currency.

All the ECB can do is delay these outcomes. The best case scenario is that the ECB can delay them longer. This time is not different at all.

 

 

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