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Monetary Union Dynamics: Through the Lens of Spain, Florida, and the United Kingdom

Monetary Union Dynamics: Through the Lens of Spain, Florida, and the United Kingdom. Jared Isenstein and Ashoka Mody The Woodrow Wilson School, Princeton University March 24, 2014. De Grauwe’s Spain-UK paradox: Call for eurozone lender-of-last resort . Source: IMF WEO, DataStream

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Monetary Union Dynamics: Through the Lens of Spain, Florida, and the United Kingdom

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  1. Monetary Union Dynamics:Through the Lens of Spain, Florida, and the United Kingdom

    Jared Isenstein and Ashoka Mody The Woodrow Wilson School, Princeton University March 24, 2014
  2. De Grauwe’s Spain-UK paradox: Call for eurozone lender-of-last resort Source: IMF WEO, DataStream Reproduces Figures 1 and 2 of De Grauwe, 2011
  3. No Paradox UK crisis was over—Spanish crisis had been brewing and was about to be manifest De Grauwe focus on absence of lender of last resort misses deep underlying destabilizing nature of eurozone, before and after crisis Capital and labor flows highly cyclical, Florida-like boom not accompanied by private risk sharing Governance encourages procrastination, hence build up of pressures Persistent crisis without fiscal adjustment mechanisms
  4. But in May 2010, the Spanish banking sector was rumbling June 2010 Source: Euro Crisis Monitor
  5. The anatomy of the boom

  6. The Property Boom

  7. Similar house price booms, larger construction booms in Spain, Florida Source: FRED, Eurostat, UK Statistical Release, OECD
  8. Reflected in real estate drivers of investment and growth
  9. GDP and Employment Growth Source: FRED, Eurostat, BLS

  10. Credit Boom

  11. Large Spanish credit boom—Florida banks also boomed but had low presence Source: FRED, Eurostat, World Bank
  12. Fuelled by construction and real estate lending Source: Banco de España (BdE), Bank of England (BoE), IMF WEO, Eurostat
  13. Spain’s domestic credit boom fed by foreign funds Source: BdE
  14. UK Banks were more leveraged… Source: Bloomberg
  15. Spanish banking vulnerabilities started unfolding in 2010 Source: World Bank, Bloomberg

  16. Public Finances

  17. Public Debt: the evolution from 2010 De Grauwe ends Source: IMF WEO
  18. Much of its prior fiscal health was illusory Source: IMF WEO
  19. Spain’s revenue collapse from sharply falling property revenues
  20. Florida Benefitted From Fiscal Transfers Source: IHS Global Insight, Consolidated Federal Funds Report, FDIC, IRS, DoL

  21. Adjustment through Migration

  22. Large Spanish immigration has turned into emigration—no emigration pressures in Florida Source: US Census Bureau American Communities Survey, Eurostat
  23. Young Spanish migrants are leaving—for South America and Africa Source: Spain National Institute of Statistics
  24. Florida’s migration is ongoing, with little boom and bust—Spanish migration is procyclical Source: US Census American Communities Survey, Eurostat

  25. Monetary management

  26. Spanish inflation: pre-crisis much higher than Eurozone’s, now deflation risk looms Source: BLS, BdE
  27. Spanish inflation had a much higher deviation from eurozone average Productivity and Real GDP Growth in Spain and the Eurozone, 1996-2007 Source: BLS, BdE, Eurostat, Rabanal (2009)
  28. Monetary policy also contributed to Spanish Inflation Note: Before September 2004, EONIA is used in substitute for the shadow interest rate for Spain Source: Wu and Xia (2013), Euribor/ECB, BdE, UK Office for National Statistics, BLS
  29. Findings The UK did not really have a crisis strong countercyclical monetary policy Mindless austerity delayed recovery Florida and Spain did have similar crises But Spanish pre-crisis imbalances more broad-based and prolonged Spain also more handicapped by incomplete monetary union: little private risk sharing Costly crisis management delays No fiscal adjustment mechanisms Now, Spain forced to into more adjustment: Loss of young workers to migration and atrophy Threat of deflation, with no offsetting monetary policy action Continued austerity and deleveraging
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