De-Euroizing Spain

Corcoran310 tweets “I really think u should do what u can to get Spain to ditch the euro. a weak Spanish currency would be awesome, I love madrid.”

I love Madrid, too. Barcelona is of course excellent but everyone knows that. Madrid is both excellent and underrated. And with currency devaluation, it could be cheap as well. But how to get there? The simplest resolution is to go rogue—quit the Euro, in effect default on debts, suffer the bank runs, and then when the economy’s moving assume it’ll be possible to work some stuff out.

Another path would be this. The Spanish government has two kinds of accounts payable. One is interest and principle on bonds it’s issued in international capital markets. The other is things like salaries, pensions, and transfer payments. Right now, all of this is denominated in Euros. Spain could take its Category 2 obligations and announce that henceforth 50% of all salaries, pensions, transfers, etc. will be paid in Euros and 50% will be paid in newly-issued Españos and also that 1 Españo is equal to 1 Euro in value. Concurrently, the government announces that everyone can now pay 33% of their taxes in Españos and that the minimum wage of 633.30 per month is now 633.3 Españos per month.

So now a bunch of Spanish pensioners, transfer recipients, and public employees are going to have a bunch of worthless Españos in their pockets that they’ll be eager to dump. But firms will be eager to accumulate some Españos in order to pay off their tax bill. So the market will establish some kind of exchange rate between the dear Euro and the cheap Españo, and it’ll make sense for firms and workers to start accepting Españos as payment for this or that. The government is basically simultaneously engaging in monetary expansion, currency depreciation, austerity budgeting, and minimum wage cuts which I think is about as close as a “all the prescriptions from all the schools of thought” solution as Spain is capable of mustering. Since Spain’s heavily indebted private sector has its outstanding debts denominated in Euros, you’ll still have a very nasty problem of unbalanced debt deflation but I don’t see any way around that.

The cheap money should lead to an influx of Northern European tourists, a crash in Spanish consumer purchases of imported goods, and booming exports of Spanish wine. To steal some charts from Martin Wolf the main thing for Spain to recognize is this:

Right now in sovereign debt terms Spain is in okay shape, especially compared to Ireland, Greece, and Portugal. But on the underlying question of labor costs, Spain is in as bad a shape as anyone. Forget the question of whose “fault” the current situation is. Just note that Spain and Germany have seen their labor costs diverge a lot. That means a European Central Bank policy that’s appropriate for Germany won’t be appropriate for Spain. And yet the ECB will make policy that’s deemed appropriate for Germany. So Spain has a big economic problem. And as we’ve been seeing in Ireland, round after round of austerity budgeting if not paired with monetary expansion will (superficially) forestall debt-repayment issues at the price of making the economic problem even worse.

Long story short the voters in Sweden and the UK owe a debt to the politicians who kept them out of the Euro.