Bringing back the peseta won’t solve Spain’s problems

It is not austerity but the threat of insolvency that is killing peripheral economies such as Spain. Since it has become clear that the European Union is not willing to completely mutualise risks and that, as a consequence, some countries may prefer to abandon the euro rather than restructuring their private and public debt, no capital seems to be safe inside any of the candidates to default and depreciate their currencies.

One just needs to take a look at some figures to realise the level of distrust which is undermining these economies. The best known case is the deposit flight which has taken place in Greece since the end of 2009. Greek banks have lost around 80 billion euros in the last two and a half years (equivalent to almost a third of Greek GDP) despite the huge transfer of funds from the European bailout plan.

However, Greece is not the only country in which investors have lost their faith. The figures for Spain are also alarming: in the last 12 months, Spanish public debt in the hand of foreigners has fallen from 52% to just 37% of the total. Furthermore, Spanish banks have greatly increased their dependence on the European Central Bank liquidity lines: Target 2 data show that (extraordinary) funding from the Eurosystem to Spanish banks has risen from 40 billion euros to 300 billion euros.

Capital is keeping out of Spain not because of too much austerity and too much internal saving, but because indebtedness is too high and is not being properly addressed by the new government. Unless Spain proves to its creditors that it can honour its liabilities, investors will not return, and without the aid of fresh entrepreneurial projects it will be difficult for an economy which relied too heavily on the housing bubble to start growing again and to absorb its six million unemployed (25% of the whole labour force).

The solution will come neither from more impoverishing debt-based public expenditure plans nor from more liquidity injections by the ECB. A solvency problem cannot be fixed by rolling-over debts; it can only be delayed at a high cost. We need larger public and private savings that allow our economic system to deleverage, to self-finance our maturing debt and to readjust our old-fashioned structure of production.

Leaving the euro and depreciating a new currency may seem like an easy and fast way to correct current imbalances. It is argued that Spain would regain competitiveness and attract foreign capital by offering assets at bargain prices. But returning to the peseta might not be such an attractive path after all: currency devaluations are equivalent to a default on external liabilities, transferring debtors’ problems to creditors; and currency devaluations increase the cost of imports and, unless they can be replaced by internal production, may have a limited impact on export competitiveness.

Moreover, let us not forget that a national currency would allow politicians to monetise much more public debt in order to fund their colossal deficits (as they are currently asking the ECB to do), thus postponing all the healthy internal adjustments and reforms that Spain so urgently needs. Given Spain’s track record with devaluation (between 1992 and 1995, the peseta was devalued a 30%, while our unemployment rate remained above the 20% up to 1998) one should not think that an implosion of the eurozone would help the Spanish and world economy to recover. Precisely the opposite seems more plausible.

In the end, however, Spain will only be able to keep the euro (a very imperfect currency but a long way better than its obvious alternative: floating national paper currencies) if reforms and austerity are enacted much faster. The new government has promised to reduce the budget deficit from 8.9% to 5.3% of GDP, but so far spending cuts have been minimal while savage tax increases threaten to further damage the economy while not providing any extra revenue in this recessionary environment. Labour market liberalisation measures still give trade union and courts too much power over contracts between workers and entrepreneurs. And financial reforms are forcing banks to raise more than 80 billion euros to cover past losses but do not specify where this money will come from (raising the likelihood of an expensive governmental bailout).

Current policies are clearly insufficient to bring the country out of a bankruptcy scenario. Time is running out yet Spain’s politicians are failing to grasp the urgent need for radical reform.

Juan Ramón Rallo is Director of the Juan de Mariana Institute.

13 thoughts on “Bringing back the peseta won’t solve Spain’s problems”

  1. Posted 22/05/2012 at 11:40 | Permalink

    Congratulations Professor, pretty clear!

    Maybe you just missed to add that “leaving the euro and depreciating a new currency” might not be the solution for us all, but for the politicians “would feel much easier”. Instead of having to figure out what or how to cut expenses, or find a new tax to rise, they can just print what they need and let us (the non-rulers and taxpayers) carry the heavyweight of (hyper)inflation on our backs. But anyway, they will never recognise this out aloud.

  2. Posted 22/05/2012 at 15:14 | Permalink

    Xavier Bosch entrevista Jordi Galí, assessor del Banc Central Europeu, director del Centre de Recerca en Economia Internacional i catedràtic d’Economia de la Universitat Pompeu Fabra.–22052012

  3. Posted 22/05/2012 at 22:42 | Permalink

    Its the EURO that created the economic mess not the former national currencies that kept the countries in check with expences to revenue flows. With the EURO these countries spent massive amounts on EU programs that were forced upon them the same as the Federal govmnt in America does to each state with ubfubded mandates. But the bigger picture is the EU has to fail,its the UN’s baby for world control ie the experiment is the EU block for global governance!

  4. Posted 23/05/2012 at 06:09 | Permalink

    Nothing is further from the truth.

    Before the Euro, former national currencies “were printed” just as the politicians needed them to make up for their huge expenses. They were NEVER faced against their irresposability.

    With the Euro they now HAVE TO behave!

    The UE is not a bad idea, well, maybe the UE is, too much focus in politics and central governement and much less on freedom across countries in markets and all. But the original Common European Market idea is for sure a good one, and who knows, maybe it will be what is left after all this.

    The point is that the Euro (or the Gold standard) are not bad ideas, you need international currencies, preferably with a stable value, in order to trade globally with ease and lower costs. The Euro is a bad proxy of Gold, but it somehow it imposes a limit to bad rulers.

    Do you want a currency that your ruler can make into crap from one day to the other? (as it happens in non serious countries like Germany before WWII, Argentina from the 50s, the US sooner that most think, Greece in a few months or maybe Spain soon enough)

    Or do you want a real and stable currency, with the SAME value everywhere that none can mess with?

    Money and wealth are different things, but if money is paper or credits on a computer that a single ruler can expand as he/she will, that will give him/her the outrageous power to steal silently from everyone else, specially who generates actual wealth working everyday.

    Is that what you want? Cause I don’t, it seems stupid to want to get robbed constantly.
    (Or maybe you live from the rule’rs printed money instead of generating real value for others on the market, in that case we understand your position… 🙂

  5. Posted 23/05/2012 at 14:09 | Permalink

    Recent history suggests that neither the euro nor national currencies will be effective at preventing inflation. Surely the best solution is to take the money supply completely out of state control (whether national or supranational).

  6. Posted 23/05/2012 at 14:12 | Permalink

    Of course, but the Euro is a better proxy of Gold than the Peseta or the Dracma, just because it needs several politicians to agree on screwing the currency at once, which has proved to be difficult so far.

  7. Posted 23/05/2012 at 17:12 | Permalink

    I’m no fan of national currencies, but unfortunately there are also strong incentives for European politicians to pressurise the ECB to monetise their debts – even if it is indirectly via loans to eurozone banks who then buy bonds. Another concern is the extent to which the eurozone’s one-size-fits-all monetary policies contribute to extreme volatility in the money supplies of some eurozone countries, e.g. M2 rising at 30% pa in Spain and 40% pa in Ireland during the boom period.

  8. Posted 23/05/2012 at 18:41 | Permalink

    Maybe thats true, although there is something you may not know about Spain that can explain the M2 rising (I cannot speak about Ireland, I don’t know their case)

    Before the crash, there was a very wealthy business going on here in Spain, run by politicians of course:

    1) They made land laws in the 80s that haven’t changed much since, no matter the ruling party, giving them TOO much power on building policy. Townhalls had so much control on buildable land (even not being owners of it) and what could be build or not in them or who would have which license that there was a kind of sortage of land to build on a country with half Germanys population BUT about the same size.

    One example how this is so stupid; IKEA, the famous company that comes from every-socialist-dream country, Sweden, complained that it was too costly and slow in Spain to get all the licences and paper work to open a new shop. Even in the middle of the recession. And those guys are probably used to quite some bureacracy and licenses in Sweden, so we are much worse!?!!

    2) This was very profitable for Townhalls, who collected big taxes on land and building licenses. Not to mention “the ilegal traffic of suitcases” to ease licensing grants or making company A win some public building contract or project instead of other companies with no such “nice suitcases”.

    3) At the next level, the Autonomias (kind of Federated states and sometimes even more independent) controlled the Cajas, which were a kind of public banks with no stockholders in charge and with lots of politicians on their director boards.

    This Cajas, with the help of the BCE and Fed and their too low interest rates compared to savings, made sure any building project found the money they needed, even the most stupid brain****ed public project will get done. And also as people got the mortgages, housing prices could go even higher.

    It was a “perfect circle”, Townhalls got a lot of money from their ruling powers and from the help of the Autonomias controlling most of the Spanish bank system. And Autonomias where getting money and projects done thought the credit their Cajas gave them (that is they gave to themselves).

    There was only a small problem or two:
    – Housing couldn’t go up 15% a year for ever, specially when we were building more than the rest of the UE altogether.
    – Neither could debt couldn’t pile up forever, specially when you don’t make that monetary drug called dollars that everyone still wants even if its worse and worse everyday Bernanke “prints and prints”.

    People were told that only the building companies were making tons of money on the housing bubble, they were the ONLY ones to blame… but that is not true as I explained here.

    Together with bank, building companies happened to be the necessary accomplice for all this plan to “work well”. As a payment, banks get bail outs and cheap BCE credit now and the building companies got softer bankruptcy laws, tax deductions on buyers, etc while they serve as scapegoat for politicians at the same time.

  9. Posted 22/07/2012 at 14:13 | Permalink

    Anyone willing to share IS/LM models on Spanish economy?

  10. Posted 07/08/2012 at 04:04 | Permalink

    I had to laugh when I read this nonsense about the ptas would be a bad idea to return to.

    España needs to leave the EU and go back to our original currency.

    There is a reason why 3 EU countries (removed by moderator) refused to accept the EURO.

    We rejected the Euro, the common people…but no, Germany was having non of it, and further more nor was the spanish government. We where forced into this fraudulent currency. Just as we predicted back in 99 this was a very very bad idea.

    We have been worse off with the euro…not sure how you can say the ptas would be devalued?? against what criteria would this be the case?

    There are some small cities and towns, that still accept the’s been estimated by the bank of spain there is anywhere from 5/7% of the former currency still in circulation, as long as it can still be converted.

    The conversion rate is roughly 1.66ptas for 1 Euro, this is maintained by
    Banco de España..for which despite the bank say they are not going back to the ptas…they are still legally trading in the currency from within side the country from these small places.

    that 5/7% in circulation equates to around 2 billion ptas in people’s pockets…but unfortunately there is no desire for this corrupt government and criminal leader to acquiesce and revert back to the ptas, partly because he has stolen and bribed millions of euros from taxpayers and business..

    The sooner this country pulls out of the Euro, the better off we would all be in España, that and putting the tyrant leader and his ponies into prison.

    We have demonstrations around most big cities at night, especially around andalucia to force this sick government to take notice and change and fire people…to give us our jobs back…unemployment is 18%…the highest in the whole of europe…never mind greece…

    Will we go back ptas? its just a matter of time before we abandon the EU and the Euro, because we won’t have any choice…the country is already hurting and imploding..most foreign nationals leave by the day, homelessness numbers are beyond excess…every day hundreds and hundreds of people are evicted because they cannot pay their rent because their jobs no longer exist, and there is literally no job to go to…makes me very mad and sick…

  11. Posted 07/08/2012 at 11:05 | Permalink

    In Spain we have a choice, we are in a crossroad and we basically have 2 ways to choose from.

    1) One would be the “I want to be a serious country” way, like the path Sweden choose in the 90s and are still walking. That path says that debts are to be paid as much and as soon as possible, that printing paper money DOES not solve problems, that you have to control expenses and get back to being a serious country that others countries can rely on and make business with and people within and outside it can also work or trade with.

    2) The other is “I am not paying and I don’t care” way, Like Argentina. A country that is adding 2 o 3 zeros to their currency every 5 or 10 years. A country that was one of the richest in the 1950s and now has one or two big crisis every decade (they are stating one again right now with the currency again)
    This second path also means more corruption, more “pelotazos” that is business that thrive are not the ones that compete better for costumer satisfaction, but for “political help”. More Construction and holidays companies, less technology companies, etc The triumph of the “well connected” and “dishonest” over the “geeks”, “hard workers” and “innovators”.

    So what’s it going to be?

  12. Posted 07/08/2012 at 11:13 | Permalink

    And please, give accurate numbers.

    Unemployment in Spain is nearly at 25% right now, yes that means 1 out of 4 unemployed.

    18% is just the unemployment in the Madrid area. In Andalucía, last time I checked it was well over 30%.

    And some data to take into account:

    It is ilegal to offer OR ACCEPT jobs below some 600€x14 a year in Spain.

    To make sure the employee gets 1€ of salary BEFORE taxes, the employer needs to pay 1.4€ total.

    That means that you are not allowed to expend less than 11 760€ a year on a employee, that person is only going to get 8400€ BEFORE taxes out of that (after taxes even less) and he/she is NOT allowed to invest the difference the way he/she prefers anyhow.

  13. Posted 08/08/2012 at 20:00 | Permalink

    josvazg on Tue, 07/08/2012 – 12:05

    Exactly right!

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