Spain: The Textbook

In a classic paradox, Spain is providing a valuable textbook study of supply and demand (for the medium of exchange, in this case)…but it is coming at the price of a lot of Spanish suffering. Paul Krugman notes:

So, whose fault is all this? Nobody’s, in one sense. In another sense, Europe’s policy elite bears the responsibility: it pushed hard for the single currency, brushing off warnings that exactly this sort of thing might happen (although, as I said, even euroskeptics never imagined it would be this bad).

He does a good job of explaining this…but doesn’t note that tight money is also what caused the problems in the US…luckily we have our own, convertible, currency. Spain? Not so much. They desperately need to increase their money supply to accommodate the increased demand to hold currency…but because ECB policy reflects the wishes of Frankfurt and Brussels — who have an innate fear of inflation even absent a threat — Spain is mired in a situation where it is going to have to accept deflation in real prices. The ECB looks unlikely to relent. I’m wondering if the equilibrium will resemble Japan.

Paul Krugman goes on to say:

Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.

But oh, what a mess.

I can’t say that he’s wrong…although I want to. It is important to note, though, that Krugman is advocating a federalist system akin to the US…he wishes to centralize power. I’m not happy with that. There is nothing that I know of stopping businesses in Spain from adopting a complementary currency like say…the Wirtschaftsring-Genossenschaft in Switzerland.


2 thoughts on “Spain: The Textbook

  1. You wrote: “who have an innate fear of inflation even absent a threat”. That reminds me of the U.S. central bank’s fear of inflation and its timidity in changing its course for the sake of appearances.

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