The Collapse of Spain

Great Paul Krugman post illustrates the point that the budget crisis in Spain has basically nothing to do with irresponsible budgeting. Pre-crisis Spain had a budget surplus and a low debt load. The problem is that the structure of the EU has made it impossible for Spain to adapt to a large negative shock:


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.

Alternatively, if the EU were like a real country, then funds would be flowing into Spain from other parts of the union, the way that taxpayers all across the country are sending Social Security and Medicare and Recovery Act funds to Florida.

This sorry situation strikes me as just another example of the accountability free zone the international elite has created for itself. Obviously something like a monetary union is going to be an elite-driven project. Which isn’t necessarily the worst thing in the world, but it means that when it doesn’t work out there should be some kind of . . . something . . . from the people in charge. But you don’t hear any hint from the European Central Bank officials that maybe this mass suffering in Southern Europe is the consequence of some flawed thinking out of Brussels and Frankfurt. Instead all you hear are lectures about the need for austerity. The fact of the matter is that the lecturers are right—southern Europe does need austerity. The brunt of the suffering for this error will be borne by the unemployment, and solving the problem will require cutbacks by Spanish pensioners, schoolteachers, cops, and all the rest. But the responsibility for the problems lies elsewhere.