A crisis with Capital C

The current economic crisis in Spain is the result of a property bubble, some squandering of taxpayer’s money, and the impossibility of currency devaluation.

All three are attributable to the euro.

The issue may be of interest to you because Austria and Spain are members of the eurozone, and that links our destinies as nations more than it appears to the naked eye.

Will the euro get bust? Is there hope?

Let me present the face of the economic crisis in Spain

This is Valencia Opera Theatre. Impressing, isn’t it? It resembles the Sydney Opera, doesn’t it? It is the work of famous Valencia architect Santiago Calatrava. Any guess about its construction cost?

332 M €!

How many operas do they perform? 5 a year. The losses it generates are colossal: 7.5 M € per year.

They celebrate weddings. Hey, are you planning to finally wed your long-time partner? Looking for an original setting? This is it. Your guests will be delighted.

And what is this?

This is the unemployment in Spain: 25% of the labour force (52% among the young). That’s one in every four, 6 million people. That’s about two times the labor force of Austria. Can you imagine, two Austrias unemployed?

> S 3

This is part of the installations made for the 2007 America’s Cup, a yachting competition extravagance, that lasted 6 months. The building is now unused.

Any guess about its cost?

35 M €

Hey, they celebrate business meetings. Do you like to impress your clients? Bring them here, by the sea.

And what is this, 426 €?

This is the amount a long term jobless person receives as benefits (per month). A misery

This is the high-speed train station. This train covers the 350km Valencia – Madrid itinerary in just 90 minutes at 300 km/hour. The cost of the whole project?

6.6 billion €

This number refers to people: 11.5 M

And this is the number of Spaniards in risk of social exclusion or outright poverty

So, what is happening? Where is Spain, once the eight economic world power, present football world champion going?

To begin, let’s make a little history.

The monetary union that formed the euro was a half-baked cake. Theory holds that a currency union has to be accompanied by banking, fiscal and economic union. This was not done so, in the hope that, after the monetary union came into effect, eurozone economies would somehow align themselves together behind the best performers.

Economies actually diverged and, when times were good, this wasn’t noticed too much. But, when the economic crisis hit hard in 2008, the differences became apparent between the core (Germany, Holland, Austria) and the periphery, the so called PIGS (Portugal, Italy, Ireland, Greece, and Spain).

When the financial crisis of 2008 of the subprime mortgages exploded in the US, and spread throughout the world, Spain was not affected very much, but we had our own subprime.

The advent of the euro had a very important effect in Spain: the cost of borrowing lowered substantially. We were able to borrow at rock-bottom German interest! Spain’s businesses and families went on a buying spree.

A credit bubble developed. It created a tsunami of debt. Nobody dared to stop it. It would have been like arriving to a party and pulling off the plug of the music equipment.

Spain’s public and private sectors owe now approximately 300 % of GDP 250 to foreign creditors.

Spain was a country heavily geared towards construction so, with the cheap credit, there was a construction boom. And a property bubble that created a mountain of unsold houses.

So we had two bubbles: the credit bubble and the property bubble.

The Spanish property bubble is now so famous that it even in the Wikipedia! Here it is!

It’s curious how well adjusts this curve to the theory.

History of bubbles show that the price has to come down to be adjusted to the inflation (the green line).

When the property bubble burst and prices fell,  Banks, especially Local Banks were up to their ears in property when prices fell. Suddenly they found they were broke.

They fell like a castle of cards

Then, we had a financial crisis.

As banks, conventional wisdom says, cannot go bust, the Government came to the rescue. But it wasn’t enough.

Spain had to ask the ECB for a rescue of our Banks. BAILOUT!

The Eurogroup president was not very happy, as you can see.

The diagnostic:

-      public deficit is caused by the generosity of the welfare state

-      commercial deficit is caused by high salaries and lack of competitiveness of businesses

-      over indebtedness of families is caused by their incontinence in the property expense

The treatment:

Compulsive austerity policies.

If we listen to Nobel Prize economist Paul Krugman, in his book “End this depression now”, he considers that, to attempt fiscal consolidation in an economic depression, only makes things worse.

As happened in 1930 and 1933 with the austerity measures of Herbert Hoover in USA o Chancellor Heinrich Brüning in Germany, the policies of our Governments are wrong on the diagnostic and on the therapy.

Spain has entered into a vicious circle. Where spending cuts result in a depression in demand, a contraction of GDP and a shrink of tax base, more deficit, more interest and new recipes from the Troika

We have described the economic effects, but what about the social effects?

-      Social unrest

-      Poverty is being visible

-      Territorial tensions

I can see that in the street myself.

In the meantime, the European pundits and politicians are wondering what to do first: the fiscal union, the banking union, or the political union.

Is there hope?

I think that the EU will not permit the euro to break up. So much is at stake. It will set the Union back 50 years.

Spain has been through difficulties before and we have always overcome them. I remember the post-war years.

So, lets reconstruct the euro. Let’s trust it will reinforce, not weaken the union.