2010/02/15

So who are the "PIGS"? Spain & the European Disunion

Greece's financial near-collapse threatens world-confidence in the euro, which would be very bad for business in all 16 members of the European Union that use the euro. A Greek default would be a disaster for banks, both European (especially German) and beyond,so bankers and finance ministers are very anxious to avoid it. And as we've seen, they are horrified by the idea of having to resort to the IMF, associated with handouts to non-Europeans. So then they're going to have to come up with funds in some fashion to meet Greece's obligations. Or… A recent poll shows that 53% of Germans want Greece booted out of the euro zone.

And according to Krugman, the mess in Greece, with its $343 billion GDP (making it the European Union's 15th largest economy) is nothing compared to the far dangers of instability of Spain, the EU's 5th largest with $1,438 billion GDP.

As Krugman is quick to point out, the causes of Spain's precarious economic position (20% unemployment, 11% deficit) are entirely different from Greece's finagling with the books, and only tangentially related to tiny Portugal's problems or Italy's massive and systematic criminal plundering of the state (a lot of it by the head of state himself). Portugal, Italy, Greece and Spain are all very different. But the catchy acronym PIGS covers them all with the same slime in much foreign economic commentary.

What happened in Spain is that a huge and unsustainable construction boom created massive debt (Spanish and foreign banks lent out vast sums of money that they themselves had borrowed in the international market to finance ever bigger development projects), and when the boom busted and prices fell or houses became totally unsellable, there wasn't enough money to pay the labor or the banks or the contractors or, of course, the last guys and gals on the list of creditors, the workers. Construction companies, big realtors, people making and leasing cranes and bulldozers and other machinery for the industry, car manufacturers used to selling high-priced models every year to ever richer speculators, and everybody who worked for any of them, suddenly broke. And the banks stuck with unrecoverable debt and/or repossessed building developments with no buyers.

One currency, many economies just isn't working very well. But the governments that most strongly backed the creation of the single currency -- Germany in particularly -- are also the ones that most firmly resist taking further steps to integrate their economic policies, such as common taxes, pension benefits, health and education budgets, etc. The United States, another large region with a single currency, also has big inequalities of wealth and needs as between, say, Mississippi and Massachussetts, or now-bankrupt California. The diversity of economic policies across the 50 states is still not as great as that between, say, just for example, Greece and Germany, and-- as far as I know, anyway -- nobody is seriously advocating that California abandon the dollar and create its own currency which it could devalue or inflate as needed, but maybe it should be considered.

Anyway, the euro is what we've got, and going back to pesetas (Spain's pre-euro currency) would be pretty traumatic. There are probably more benefits than harms to the common currency, if we can just get through this rough patch. But to do so, to pull out of this very deep recession, the government is going to have take decisive action: job creation, infrastructure investments, pacts with unions and employers to restrain wage and price hikes -- the kind of thing that most of the parties in parliament are trying to work out with the Socialist government, which needs their support to get any laws passed. But that's just what the Partido Popular is doing everything it can to prevent.

Economic failure of the Socialist government looks good for Popular Party electoral chances. The only problem: The way they're going, if they succeed, they'll be governing a ruin, not a functioning economy. And these are the guys, the PP and their allies, who created the frenzied construction boom and enabled the debt. Now they're going to fix things? Fat chance!

Anatomy of a Euromess - Paul Krugman Blog - NYTimes.com

Greece Threatens Bankruptcy, And the Euro Zone - The Atlantic Business Channel

Ben Bernanke, The Global Saving Glut and the U.S. Current Account Deficit (March 10, 2005)