May 3, 2012
The economic crisis in Spain continues to deepen, whilst the future of the Eurozone banking system hangs in balance. It increasingly looks as if the eurozone crisis is to a large extent an economic growth crisis.
Spain ad an enormous housing bubble and when the bubble burst, the Spanish economy was left high and dry. Spain’s fiscal problems are a consequence of its recession , not its cause. Even though the cities the bars and restaurants in Madrid and Barcelona are full, there is rising unemployment, increasing homeless, increasing numbers of people getting evicted from their homes as banks foreclose on properties bought during the boom; derelict buildings, closed down businesses, banks with lots of bad debts from the housing bubble; business investment is collapsing. The social effects are quite evident in the poorer regions --eg., Galicia.
The politics of austerity continues to rule in Spain even though tightening fiscal policy in the teeth of a recession is very dangerous. This is to pursue self-defeating economic policies. Fiscal austerity of the order required by the EU will simply push the Spanish economy into a slump, which in turn will worsen the debt position of the private sector, amplifying the required amount of deleveraging, and ultimately how much private bank debt ends up on the state's books.
The assumption in the Eurozone is that the eurozone will extricate itself from the crisis – and become a more stable arrangement over the long term – if it ‘Europeanises’ German discipline. Eurozone policy-makers base their confidence in the current strategy on the belief that the private sectors of the hard-hit economies are going to ride to the rescue. Indeed, they believe that austerity and structural reforms will make more households and firms confident to spend and invest.
It is far from clear why already-indebted Spanish firms would suddenly start to invest in the teeth of falling demand. Nor is it clear why households – facing unprecedented unemployment – would increase spending.
However, Philip Whyte points out that the eurozone’s essential character remains unchanged. It is still what it was when it was originally launched: a currency which is embedded in a fiscally decentralised confederation, rather than a fully-fledged federation (such as the US). The thrust of all the reforms has been to reaffirm the eurozone as a rules-based currency union. Whyte says that:
In the end, it is the politics of the eurozone crisis that make its economics intractable – not the other way round. At root, the eurozone is in crisis because most voters still think of themselves as nationals first and Europeans second. The eurozone’s fiscally decentralised structure simply reflects the fact that solidarity is weaker across European borders than it is within them. The upshot is that EU leaders do not have a democratic mandate to complete the currency union. Their political commitment to the euro remains strong. They will do all they can to prevent the eurozone breaking apart, and will probably succeed.
It is hard to see how a European demos (and hence more stable currency zone) can emerge from the economic pain and mounting cross-border resentment that current policies are causing.