The Spanish economy

If you’d like to see what could and would have happened to us if we’d joined the euro just have a look at what is going on in Spain:

The number of Spaniards unable to pay their debts has risen by 26 per cent to 2.7million in 2009, compared with the first four months of last year. During the same period 232,000 companies joined the list of bad debtors, a 67 per cent rise, according to AsNef-Equifax, a Spanish credit agency.

Bankruptcies are up 44 per cent in the first quarter this year against the final quarter of 2008, with the worst-hit sectors being services and construction.

Unemployment is running at 17.4 per cent, the highest in Europe, with more than four million on the dole. The European Union predicts that this figure will rise to 20 per cent by next year. Some Spaniards have to accept soup-kitchen meals to feed their families.

What has happened and is happening is quite simple. Being in a single currency inevitably means having a single interest rate. And that rate is going to be set for the majority, not for the needs of certain sectors of that currency area. Interest rates in Spain were too low for too long, setting off a huge construction and borrowing boom. Yes, very much larger than the one in the UK.

When it comes to an end, as all booms do (no, no one has abolished boom and bust) then there are several desirable policy responses. One can lower interest rates, one can deliberately devalue the currency for example. Or one can let the economy sffer through very painful deflation as Spain is doing.

For, of course, as members of the euro Spain cannot lower their interest rates nor can they devalue. Both things which we in Britain have done. Thus Spain’s recession is going to be deeper and longer than our own, for they do not have the room for policy manouvre that we do.

If we’d been in the euro our boom would have been more manic and our bust would be deeper than it already is. Thank goodness we didn’t join, eh?