It would appear that the Euro area was not in fact an optimal currency area.
The root cause of the bubble was the extremely lax monetary policy imported by Spain after it joined Europe\’s monetary union. Interest rates were slashed on EMU entry, and then fell to 2pc until late 2005 – far below Spain\’s inflation rate.
But of course the politicians went ahead for political reasons.
The report said construction investment made up 18pc of GDP last year, much of it funded by foreign investors. The concern is that a "sudden reversal of capital inflows" could leave the economy unable to finance its current account deficit, now 10pc of GDP – the world\’s second biggest after the US in absolute terms. The corporate sector has debts equal to 130pc of GDP. This too requires foreign funding.
Hmmm,
Spanish house sales fell 34pc in May from a year earlier, and mortgages were down 40pc.
Could it be that the old saw is correct? You can ignore economics but economics ain\’t gonna ignore you?
Only one problem with this analysis. The share prices of British banks have fallen further than those of the Spanish banks.
So if the “root cause” of the Spanish property/banking crisis is their membership of the euro, what is the “root cause” of Britain’s property/banking crisis?
Perhaps we’d have been better off in the eurozone afterall!
Tim adds: You’re trying to measure the health of the economy by bank share prices? How odd.
Both countries are mired in crises of their own making. You choose to conveniently blame the euro for Spain’s problems. What then do you attribute the UK’s very similar problems to? The pound?
“The root cause of the bubble was the extremely lax monetary policy imported by Spain after it joined Europe’s monetary union.” – this is Pritchard’s not-especially-surprising opinion, rather than Morgan Stanley’s analysis.
And it’s bollocks, because it ignores the fact that Spain could have used fiscal policy to dampen the boom, but chose not to because every politician loves a boom.