{"id":7208,"date":"2010-01-08T17:32:27","date_gmt":"2010-01-08T06:32:27","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=7208"},"modified":"2010-01-08T17:32:27","modified_gmt":"2010-01-08T06:32:27","slug":"espana-se-esta-muriendo","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=7208","title":{"rendered":"Espa\u00f1a se est\u00e1 muriendo"},"content":{"rendered":"

\t\t\t\t… su tiempo para salir de la UEM. On Wednesday I was up in freezing Iceland and we saw how the threats of being prevented entry into the EMU had led the Icelandic government into bowing to the unjustifiable bullying of the UK and Dutch governments and violating the wishes of its own populations. A greater authority (the President) intervened and hopefully the Icelanders will tell goliath to take a walk. Today I have travelled south into the EMU – to Spain where the weather is kinder but the economic climate is very harsh indeed. The situation in Spain tells us all that the Euro system was always built on corrupted neo-liberal rhetoric and now it is buckling asunder as the first real test of its logic is causing havoc among ordinary people. I am sure those officials in their warm offices and well-paid jobs in Frankfurt and Brussels are not enduring what a significant minority of Spaniards are now going through. One statistic is enough to tell you the EMU system is a failure – 53 per cent of Spanish youth (16-19 year olds) who want to work are unemployed! So … Espa\u00f1a se est\u00e1 muriendo … su tiempo para salir de la UEM (Spain is dying … its time to leave the EMU).
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\nFinancial Times chief economist Martin Wolf wrote on January 5, 2010 that The eurozone’s next decade will be tough<\/a>. He initially posed the question:<\/p>\n

\nWhat would have happened during the financial crisis if the euro had not existed? The short answer is that there would have been currency crises among its members. The currencies of Greece, Ireland, Italy, Portugal and Spain would surely have fallen sharply against the old D-Mark. That is the outcome the creators of the eurozone wished to avoid. They have been successful. But, if the exchange rate cannot adjust, something else must instead. That “something else” is the economies of peripheral eurozone member countries. They are locked into competitive disinflation against Germany, the world’s foremost exporter of very high-quality manufactures. I wish them luck.\n<\/p><\/blockquote>\n

And it was in that context that I read the latest news from Spain today which shows that the national unemployment rate in December hit 19.3 per cent (more than double the EMU average).<\/p>\n

First, it is useful to just backstep a few years. Prior to 2008, the Spanish economy was held out as the darling of Europe however the reality was quite different when you consider it from the perspective of modern monetary theory (MMT).<\/p>\n

Spain was running budget surpluses by 2005 and foreign investment was booming. Most of this investment went into construction which was stimulated by a massive real estate boom.<\/p>\n

Using data from Data<\/a> from the Banco de Espa\u00f1a (central bank) I graphed the national budget deficit as a percentage of GDP for Spain and the EMU overall from 1989 to 2008 (data for the EMU clearly didn’t start until 1995). You can see the tightening of fiscal positions as the Growth and Stability Pact provisions were forced on the EMU nations. By 2005 Spain was considered to be conducting highly responsible fiscal policy.<\/p>\n

The irony is that Germany and France which were most vehement about the deficit rules in the Maastricht Treaty were the worst offenders!<\/p>\n

The reality is that the private sector was being squeezed badly by the fiscal drag. The external position was in deficit (current account) which means the public and external balances were draining growth from the economy. Yet it still boomed up into the onset of the crisis. How did that happen?<\/p>\n

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EMU and Spain: Budget deficit % of GDP, 1989 to 2008<\/figcaption><\/figure>\n
<\/div>\n

Consistent with a tightening fiscal position leading to surpluses in 2005, the only way that this boom could continue was for the private sector to go increasingly into debt. That is exactly what happened and because the property boom was so large the debt levels were also very high – average household debt tripled <\/p>\n

In this 2005 Banco de Espa\u00f1a Bulletin<\/a> – you read (page 59):<\/p>\n

\nIn this setting, the volume of financing received by the private sector in Q1 continued to show notable buoyancy. In particular, corporate borrowing accelerated and its year-on-year growth stood at nearly 16%. For their part, the liabilities of households maintained a brisk pace of growth of around 20%. The breakdown of credit from resident institutions by loan purpose indicates that the most noteworthy feature between January and March continued to be the leading role of the property and construction sector.\n<\/p><\/blockquote>\n

The following graph taken from the Banco de Espa\u00f1a Bulletin (modified version of their Chart 25) shows debt ratios and saving ratios for households in Spain from the mid-1990s up until 2005. The escalation in debt and declining saving was the hallmark of the period. You will find no warning in the Bulletin about these trends – the only comment made about the debt buildup is that wealth was also rising.<\/p>\n

This is the same sort of logic that the RBA used in Australia to justify inaction on the debt buildup and to support the federal government running budget surpluses for over a decade.<\/p>\n

\"\"<\/a>
Spain: household debt and saving ratios, per cent of GDI <\/figcaption><\/figure>\n
<\/div>\n

And then … the global real estate market collapsed and the excessive vulnerability of the Spanish economy, which from a MMT perspective had been building for some years despite the official rhetoric, was exposed badly and the economy crashed.<\/p>\n

Martin Wolf says:<\/p>\n

\nThen came the crash. Inevitably, it hit the most extended private sectors hardest. Between 2006 and 2009, the private sectors of Ireland, Spain and Greece shifted their balances between income and spending by 16 per cent, 15 per cent and 10 per cent of GDP, respectively. The offset was also quite predictable: it was a huge deterioration in the fiscal position. This underlines a point that economists seem amazingly reluctant to take on board: the fiscal position is unsustainable if the financing of the private sector is unsustainable. In these countries, the latter was just that, with dire consequences, as the crisis made evident.\n<\/p><\/blockquote>\n

MMT does not use terms like a “huge deterioration in the fiscal position”. The huge deterioration is in the real aggregates that matter – employment and unemployment, GDP growth and the activities that generate real welfare. The change in the budget position from surplus to deficit is just a reflection of the huge swing in private spending – from a binge driven by increasing indebtedness to a rapidly rising saving ratio.<\/p>\n

The automatic stabilisers were always going to push the budgets of the Eurozone countries into deficit. For Germany and the Netherlands, their private balances were already in surplus in contradistinction to the real estate boom countries such as Ireland and Spain so their budget swings have been of a lower magnitude.<\/p>\n

The problem for Spain is that EMU criteria stop the budget moving sufficiently into deficit to put a floor under its collapsing economy.<\/p>\n

It is also worth noting that for Spain the crisis has been confined to the real sector as a result of the banking system being traditionally well regulated by the authorities. <\/p>\n

This was the first real test of the EMU system and it is clear that it is incapable of dealing with this sort of event. We will examine the reasons later.<\/p>\n

The real damage …<\/strong><\/p>\n

The current unemployment rate for 16 to 19 year olds is 53.4 per cent; for 20 to 24 year olds – 34.7 per cent; for 25 to 29 year olds – 22.2 per cent; and the average for the rest up to 64 years of age is 14 per cent.<\/p>\n

Where does it tell you that allowing this amount of wastage which will persist for years is a sensible policy strategy? How could anyone not understand that the losses from this amount of unemployment are so great that future generations will be carrying them in the years to come? How could it not be common sense but to allow the Spanish government to introduce widescale job creation schemes to absorb the jobless?<\/p>\n

The following graph shows the age breakdown of that unemployment rate (data from Instituto Nacional de Estad\u00edstica<\/a>) from the first quarter 2005 to the third quarter 2009.<\/p>\n

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Spain: unemployment rates by age, 2005-2009<\/figcaption><\/figure>\n
<\/div>\n

It is easy to see why this is happening. The following graph shows quarterly GDP growth rates since the onset of the recession have plummetted. The economy has had one quarter of zero growth (2008Q2) followed by 5 consecutive quarters of severe negative growth.<\/p>\n

\"\"<\/a>
Spain: quarterly GDP growth, 2007Q3 to 2009Q3<\/figcaption><\/figure>\n
<\/div>\n

The collapse in output growth has impacted severely on the demand side of the labour market and the following graph shows employment growth (per cent per quarter) from 2006Q2 to 2009Q3, which is the very similar (as you would expect) to the evolution of GDP growth. This also tells you that the major determinant of employment is output growth which, in turn, is driven by aggregate demand (for all those who think real wage levels matter very much).<\/p>\n

\"\"<\/a>
Spain: quarterly employment growth, 2006Q2 to 2009Q3, per cent<\/figcaption><\/figure>\n
<\/div>\n

The following table shows the annual changes in employment by industry (in 000s) since 2006. So in 2008 alone a massive 1.3 million jobs were lost in net terms and in the year to September 2009 a further 1.1 million jobs were lost in net terms. The collapse of construction is evident with some 700,000 jobs lost in 2008 alone.<\/p>\n

<\/div>\n
\"\"<\/a>
Spain: annual employment changes, 2006-2009, 000s<\/figcaption><\/figure>\n
<\/div>\n

How did this all come about?<\/strong><\/p>\n

So how did they contrive to develop the EMU?<\/p>\n

The EMU was justified by the concept of an Optimal Currency Area (OCA)<\/a> which emerged from the work of Canadian economist Robert Mundell. The theory purports to define the conditions under which several countries should form a monetary union. It was a case of textbook theory, inapplicable to the real world, being applied to suit ideological ambitions. Yet the policy makers used the OCA literature relentlessly to give “authority” to their decisions.<\/p>\n

Mundell defined three conditions, which if in existence, would justify the formation of a monetary union as an OCA:<\/p>\n