Monday, February 2, 2009

The Pain in Spain

The Times of London reports that, as the unemployment rate has reached 14.4% in Spain in the wake of the real estate bust there, more housewives are turning toward prostitution to make ends meet ("Few jobs and little hope as Spain faces growing crisis" -- Hat tip, Matthew Yglesias). In his post on this on his Think Progress blog, Yglesias notes that, in pre-Euro recessions, Spain had the option of devaluing its currency, which would stimulate its economy by making Spanish exports more attractive. An article by Edward Chancellor in today's Financial Times elaborates on the role the Euro is playing in the current crisis ("EMU on the rocks and all exits closed"). Below are a few excerpts from it.

The euro was created to bring economic stability to Europe. However, the politicians who promoted European Monetary Union ignored inherent flaws in the project. The credit crisis has exposed these flaws. As a result, a number of the weaker eurozone members are facing severe deflation and a quite desperate economic outlook.

The leading European politicians behind the euro project, such as former French president Francois Mitterrand, weren’t much interested in economics. In a new book, The Euro: The Politics of the New Global Currency (Yale) David Marsh shows how these politicians brushed aside the concerns of their advisers as they rushed eagerly towards monetary union. Mr Mitterrand’s vision for the single currency, says Mr Marsh, was “based on emotion, psychology and wishful thinking” rather than rational economics.

It was hoped that the euro would bring faster and more stable economic growth, while exporting Germany’s record of price stability to other members of the single currency. But many potential economic problems with European Monetary Union were identified decades ago. In 1973 Derek Mitchell, a British Treasury official, observed that the loss of exchange rate flexibility would remove a simple method for rectifying imbalances between Europe’s economies. Without the option of exchange rate depreciation, once imbalances appeared “equilibrium could only then be restored”, declared Mr Mitchell, “by inflation in the ‘high performance’ countries and unemployment and stagnation in the ‘low performance’ countries, unless central provision is made for the imbalances to be offset by massive and speedy resource transfers”.

It's worth reading the rest of Chancellor's article. He goes on to argue that the euro is playing a similarly deflationary role today as the gold standard did in the 1930s, but that it would be more difficult for euro-zone countries to extricate themselves from the euro than it was to drop the gold standard.

The photo above, of the Spanish royal family in better times, comes from King Juan Carlos's website.

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