When Spain beat Germany in the World Cup, I tweeted that Germany was going to double its resolve to destroy the Spanish economic with deflationary monetary policy. And it’s really worth checking out this eye-opening chart from Stephen Gordon which shows the extent to which Spanish people are bearing the burden of economic pain in Europe:
If Spain were an American state (call it “Florida”) then the collapse of its economy would spur large net fiscal transfers that help bolster and stabilize its economy. What’s more, the labor market linkages between Spain and other states would be pretty tight, letting people move from place to place. Consequently, in the US all the regions of the country are pretty closely packed on the 45 degree line.
Alternatively, if Spain were an independent country, then the collapse of its economy would spur massive devaluation. Everyone would get suddenly poorer and less able to buy imported goods. But tourists from Germany and the Netherlands would flock in to pick up good deals, Spanish wine sales would boom, and I might be able to afford some jamón ibérico de bellota.
Instead, Spain is having its monetary policy set basically according to Germany preferences and German needs even though conditions are very different. And fiscal transfers won’t be forthcoming. Some people tweeted back at me that the Spanish government is doing an okay job of destroying its economy on its own. But it really isn’t. Before the crash, the Spanish government was running budget surpluses. And it’s simply not possible for your economy to prosper if your monetary policy is set by people who aren’t even trying to create conditions that are appropriate for growth.