05 June 2010

Spain on the Naughty Chair

Gavin Hewitt came over all censorious in his BBC blog last week:
To an extent Spain's problem is Europe's problem. For a decade many of the eurozone countries used the cover of the single currency to borrow and expand their welfare states. In fact they were living way beyond their means. Putting that right is not just a financial dilemma - it challenges what many Europeans see as their way of life.
You could forgive him for talking bollocks because
a) he is a European correspondent not an economist
b) he is just parroting the conventional wisdom.

What does it mean for a country to live beyond its means? I don't know, but did the Spanish government live beyond its means, did it borrow to expand its welfare state?

No, until the crisis struck Spain had a fiscal surplus not a deficit. Here are the figures from Eurostat for Spain's public balance (-ve means a deficit):

2001  -0.6
2002  -0.5
2003  -0.2
2004  -0.3
2005   1.0
2006   2.0
2007   1.9
2008  -4.1

In 2007, Spain's government debt was 36.2% of GDP compared with 64% in France, 65% in Germany and 66% in the eurozone as a whole. Unemployment had fallen to 8% from over 15% a decade earlier, which I suppose would make the welfare state somewhat more affordable.

Were those profligate Spaniards loading up on government handouts? Not if you look at the data instead of relying on uninformed prejudice.

What really happened in Spain is that it joined the Euro. The ECB's job is to set interest rates for the eurozone as a whole and in the naughties big eurozone economies like Germany needed low interest rates. Peripheral states like Spain and Ireland found themselves with monetary policy which was too loose. Their economies were running too hot with fast growth but rising inflation. In Spain, inflating property prices fed a construction boom. As part of the eurozone Spain could not adapt its policy to restrain the boom or choke off inflation.

When the downturn came, Spanish prices and wages had risen out of step with other eurozone economies. Higher costs put Spanish firms at a competitive disadvantage compared to other producers. So now we have a slump in which tax receipts fall and benefit claimants increase, which is why Spain now has a large government deficit.

The target here is not Gavin Hewitt, who is a competent and entertaining journalist, it is the conventional view that the Euro crisis has been brought on by feckless Mediterranean types shirking their responsibilities. Spain gives the lie to that popular narrative.

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