I read today that over €20bn of foreign capital fled the Spanish capital markets yesterday.
Also, I read "the dollar is up" on the latest US unemployment data (which is bad). The conclusion is that, once again, international investors are leaving € assets for US tresury securities, driving the US$ up despite negative US economic data.
The Spanish IBEX35 stock index lost 6% yesterday. So what? I'm not sure I know what that is an indicator of.
In any case, it is clear that the PIGS (Portugal, Ireland, Greece, Spain) have been helped by being anchored to Germany by the Euro. Iceland's currency was destroyed in a day. I wonder what €20bn of outgoing flows would have done to the peseta were Spain still on it. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I guess patience wears thin, right? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Go to the link to see the nice graph!
As Europe is roiled by sovereign debt fears, it's important to realize that the crisis in the largest of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) has nothing to do with fiscal irresponsibility. On the eve of the crisis, Spain was running a budget surplus; its debts, as you can see in the figure above, were low relative to GDP. So what happened? Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble -- and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment. If Spain had its own currency, this would be a good time to devalue; but it doesn't. On the other hand, if Spain were like Florida, its problems wouldn't be as severe. The budget deficit wouldn't be as large, because social insurance payments would be coming from Brussels, just as Social Security and Medicare come from Washington. And there would be a safety valve for unemployment, as many workers would migrate to regions with better prospects. (Wages wouldn't have gone up as much in the first place, because of in-migration). The point is that this has nothing to do with a spendthrift government; what's happening to Spain reflects the inherent problems with the euro, which now more than ever looks like a monetary union too far.
So what happened? Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble -- and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.
If Spain had its own currency, this would be a good time to devalue; but it doesn't.
On the other hand, if Spain were like Florida, its problems wouldn't be as severe. The budget deficit wouldn't be as large, because social insurance payments would be coming from Brussels, just as Social Security and Medicare come from Washington. And there would be a safety valve for unemployment, as many workers would migrate to regions with better prospects. (Wages wouldn't have gone up as much in the first place, because of in-migration).
The point is that this has nothing to do with a spendthrift government; what's happening to Spain reflects the inherent problems with the euro, which now more than ever looks like a monetary union too far.
And that is the case despite the fact the only consequence for Spain today of being in the euro is that its interest rates are going back to what they would have been without the euro... In the long run, we're all dead. John Maynard Keynes
It sounds really good to say that labour mobility in the eurozone is low due to language difficulties and that this causes adjustment problems. Of course the reality is, both for Florida and Spain, the unemployed have nowhere to go, because nowhere in the Eurozone or the US is growing fast enough to soak up excess workers moving in from elsewhere...
I even pointed out the fiscal differences between the US and the EU in a comment to Krugman when he started saying that Spain was like Florida, but he didn't listen. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Otherwise (though he's right about the absence of fiscal and economic governance), Krugman seems not to realize workers are free to move, settle, and find jobs where they like in the EU.
Krugman:
social insurance payments would be coming from Brussels, just as Social Security and Medicare come from Washington
Out of the sky? Florida doesn't have to make any contributions? The US has miraculously become more welfare state than Europe now?
Right, because of, what was it that happened? A huge world bust caused by the American financial system -- or was it the Euro?
A Majority Of States Are Now Insolvent: Quantifying The Disastrous Unemployment Situation Zero Hedge
Did I mention I miss my TribExt? En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
despite the crash whereas the very real prosperity brought about by the euro (infrastructure investment, growing wages)
Are we talking about Spain or in general? Wait this is important. Someone is wrong on the Internet.
And I'd be curious to know how many of Florida's laid off workers are actually moving, given how many of them are unable to sell their houses, or underwater on their mortgages... In the long run, we're all dead. John Maynard Keynes
And let's not forget: French financiers fleeing misery in Paris to find riches in London. Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
See Mileuristas arrive in BusinessWeek by Metatone and my The End of the Middle Class. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
Interview with German Government Economic Adviser: Euro Zone 'Could Cope with Greek Bankruptcy' - SPIEGEL ONLINE - News - International
Greece is currently facing the prospect of bankruptcy, which could threaten the euro. In an interview with SPIEGEL ONLINE, Peter Bofinger, a prominent economic adviser to the German government, explains why he believes Europe's common currency would survive a Greek collapse and calls for a new global monetary order....SPIEGEL ONLINE: ... The financial problems of the southern European members are putting pressure on the entire euro zone. Some of your fellow economists fear a crash would trigger a domino effect and cause a rapid plunge in the value of the euro. Bofinger: Some of my fellow economists are going too far. Compared to other currency zones, the euro zone is doing a lot better than many claim. The national debts and new state borrowing is lower than in the United States. And in an emergency it could also cope with a Greek bankruptcy. The country produces just 2.6 percent of the euro zone's GDP.SPIEGEL ONLINE: Still, the loss of faith in the euro would be massive. And regarding national debt, debt within the euro zone is currently about 88 percent of its GDP. You call that figure low? Bofinger: It is not low, but it is lower than in the US. There, the national debt is 92 percent of GDP. In Japan, it is even 197 percent. And the United Kingdom's budget deficit is far worse than that of the euro zone. And as far as a possible loss of confidence is concerned, let me point out that the state of California has been on the verge of bankruptcy for months and its share of the US's GDP is about 13 percent. Viewed from that perspective, my fear of a domino effect is limited.
...SPIEGEL ONLINE: ... The financial problems of the southern European members are putting pressure on the entire euro zone. Some of your fellow economists fear a crash would trigger a domino effect and cause a rapid plunge in the value of the euro.
Bofinger: Some of my fellow economists are going too far. Compared to other currency zones, the euro zone is doing a lot better than many claim. The national debts and new state borrowing is lower than in the United States. And in an emergency it could also cope with a Greek bankruptcy. The country produces just 2.6 percent of the euro zone's GDP.
SPIEGEL ONLINE: Still, the loss of faith in the euro would be massive. And regarding national debt, debt within the euro zone is currently about 88 percent of its GDP. You call that figure low?
Bofinger: It is not low, but it is lower than in the US. There, the national debt is 92 percent of GDP. In Japan, it is even 197 percent. And the United Kingdom's budget deficit is far worse than that of the euro zone. And as far as a possible loss of confidence is concerned, let me point out that the state of California has been on the verge of bankruptcy for months and its share of the US's GDP is about 13 percent. Viewed from that perspective, my fear of a domino effect is limited.
Still, the loss of faith in the euro would be massive.
Yeah, yeah, and when the hysterical children on the ForEx markets have stopped Chicken Littleing we'll still be making the best trains, windmills and ball bearings on the planet.
So we care about the hysterical children because?
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
I mean, that line is from Spiegel.com, whose business it is to propagate Angloamerican talking points while making them look like they come from Germany. En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
I care about deconstructions because the economists nonsense will be used to push lower wages, pensions and benefits in the countries affected. A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
That's a bit disingenuous. The main benefit of the euro is that it eliminates foreign exchange risk which would otherwise exist if each EU member still had its own currency. Thus, without the euro, European economic integration would not have proceeded as quickly.
The financial industry may like foreign exchange risk, because it offers opportunities to profit from speculation and creates markets for financial derivatives, but other industries do not. A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
..financed by capital outflows from Germany.
This is BS, isn't it? Did german property speculators inflate spanish housing market??
..If Spain had its own currency, this would be a good time to devalue; ..what's happening to Spain reflects the inherent problems with the euro,
The problem is not the property bubble, it is euro??
This is BS, isn't it?
To an extent. But if you want to run a trade surplus for an extended period you'll have to either buy up your trade partners' property or lend them money. A possible German bailout of Greece or another peripheral economy would quite likely be a bailout of domestic interests.
Atlas der Außenhandelsstatistik
Handelsbilanzsaldo insgesamt 2008 in Mio EUR HandelspartnerWert Frankreich30288 Vereinigtes Königreich22510 Spanien21975
... I thought it might be useful to lay out, in a handful of pictures, how Spain got into its current state. (All of the data come from the IMF World Economic Outlook Database). There's a kind of classic simplicity about the story -- it's almost like a textbook example. Unfortunately, millions of people are suffering the consequences. ... So, whose fault is all this? Nobody's, in one sense. In another sense, Europe's policy elite bears the responsibility: it pushed hard for the single currency, brushing off warnings that exactly this sort of thing might happen (although, as I said, even euroskeptics never imagined it would be this bad). Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable. But oh, what a mess.
...
So, whose fault is all this? Nobody's, in one sense. In another sense, Europe's policy elite bears the responsibility: it pushed hard for the single currency, brushing off warnings that exactly this sort of thing might happen (although, as I said, even euroskeptics never imagined it would be this bad).
Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.
But oh, what a mess.
Seriously, I think it's actually Ireland who recently joined the Flying Club, as reported by Franck; hence PIIGS. Europeans think a hundred miles is a long way. Americans think a hundred years is a long time.
