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Monday, August 20, 2012

Spain and the allure of returning to the peseta

The Irish Economy blog has a thread on a comment article today in the Financial Times by two Spanish academics, who call on the prime minister to take radical action.

This is my comment:

The most alluring solutions are often ones that cannot be credibly implemented, at least in the short-term.

In 1994, Spain also had an unemployment rate of 24%+ In Andalucía, the rate exceeded 30%.

The peseta wasn't able to provide magic solutions and the unemployment rate was 21% in 1997.

According to the IMF, high unemployment was persistent in some regions because of centralised wage setting, giving business no incentive to move to areas, where inevitably there would be a shortage of skilled workers. Collective bargaining dating from the Franco regime mostly takes place at the industry or province level and collective agreements have the status of a law, affecting all workers and firms in the relevant area. This leaves little scope for small firms to adjust wages. Temporary jobs represent on average one third of employees because of the high cost of cutting permanent staff .

The construction boom began and unemployment fell to a record low of 8% in March 2007.

Excluding construction, Ireland had no real growth in the past decade; Italy only managed 3% in 2001/2010  - - 0.3% per year; US 16% (worst since 1945); UK 15%; France 12%; Germany and Japan 8%. Japan had a per capita annual GDP of 1.6%; US 0.7%; France 0.6% and Germany 0.8%.

In Italy, household incomes are lower than they were ten years ago. The public debt is larger. In the US, the inflation-adjusted median wage of the full-time American male worker is at the 1969 level.

John Authers of the Financial Times has written that Spain enjoyed a construction splurge in the middle of the last decade, egged on by low interest rates that were appropriate for the German economy (sluggish at the time), but not for a country where credit was growing fast. Just as the US credit bubble was helped by low rates driven by Chinese demand for US Treasury bonds, so Spain’s domestic property bubble had its roots abroad.

He asks why is Spain now in crisis, while the US is not?

Because its banks have not yet admitted the scale of the writedowns they must take in the wake of the bubble. In terms of their book value (the value of assets minus liabilities on balance sheets), have multiplied eightfold since 1998, according to an analysis of MSCI data by David Morris of Global Wealth Allocation in London. That is twice the growth for the rest of Europe, and 80% more than in the US.

The FT reported last week that Spanish and Italian commercial property markets have virtually collapsed with only three property transactions registered in Spain during the second quarter, down from 58 deals in the previous quarter. In Italy just two buildings were traded during the period, down from 56, according to data from Real Capital Analytics.

The total value of transactions for offices, shops and industrial property in Spain was €67m for the second quarter, down 74% from €260m in the first quarter. The inactivity meant Spanish property transactions were below those of neighbouring Portugal for the first time.