March 14
Spanish doldrums
I’m in Yurp for a week, spending some time on other peoples’ problems (although in a way it’s all part of the same problem.) And one has to say that Europe has gotten itself into one heck of a mess, worse even than ours — because they have intractable adjustment problems on top of the general crisis.
The poster child for these adjustment problems is Spain, where I’m currently sitting.
For much of the past decade, Spain had a huge construction boom, financed by vast inflows of capital:
Now that boom is over. But it left as its legacy a sharp rise in Spanish costs and prices relative to the rest of the euro zone (the chart below is Spanish unit labor costs in manufacturing relative to the EZ average, but it doesn’t much matter which measure you use):
Does Spain get out of this? No devaluation is possible — and no, I don’t think exiting the euro is feasible. So it has to do it with relative deflation, hard enough in normal times, when at least costs and prices elsewhere are rising a few percent a year. In the face of a depressed and possibly deflationary European economy … this is going to be ugly.
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