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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PKSG WORKSHOP ON THE CURRENT CRISIS
SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON
FROM THE LASTING BOOM TO THE SEVERE CURRENT
RECESSION. THE SPANISH ECONOMY 1994-2009
Carlos J. Rodríguez-Fuentes
[email protected]
David Padrón Marrero
[email protected]
University of La Laguna
Department of Applied Economics
Campus de Guajara – 38071
Canary Islands - Spain
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
 High and stable growth
GDP GROWTH (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
2
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
 High and stable growth
 Intense job creation
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
3
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
 High and stable growth
 Intense job creation
 Macroeconomic stability
DÉFICIT PÚBLICO (% PIB)
DEUDA PÚBLICA (% PIB)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
INFLACIÓN (%)
4
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
High and stable growth
Unexpected
severe recession
(2007-2009)
 Strong reduction in growth
Intense job creation
Macroeconomic stability
GDP GROWTH (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
5
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
Unexpected
severe recession
(2007-2009)
High and stable growth
 Strong reduction in growth
Intense job creation
 Job destruction and
increasing unemployment
Macroeconomic stability
EMPLOYMENT GROWTH (%)
UNEMPLOYMENT RATE (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
6
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
High and stable growth
Intense job creation
Macroeconomic stability
Unexpected
severe recession
(2007-2009)
 Strong reduction in growth
 Job destruction and increasing
unemployment
 Rising public deficit
DÉFICIT PÚBLICO (% PIB)
DEUDA PÚBLICA (% PIB)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Spanish economy
1994-2009
Long-lasting
strong expansion
(1994-2006)
Unexpected
severe recession
(2007-2009)
High and stable growth
Strong reduction in
growth
Intense job creation
Job destruction and
increasing
unemployment
Macroeconomic stability
Rising public deficit
What went
wrong for this
to happen?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Did something really went wrong in Spain?

Strong economy … but:
a) the accumulation of dissequilibriums
b) the financial crisis interrupted (temporarily?) growth

The failure was therefore two-fold:
a) Internal  the understimation of the macroeconomic dissequilibriums
b) Exogenous  the “regulation failure” that lead to an increasing
systemic risk that later collapsed the functioning of credit markets

Nothing did really went wrong; the financial crisis acelerated its end … but
the recession was inevitable to some extent

The only problem is that:

Minsky was right … once again
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PRESENTATION STRUCTURE
1. Identify the underlying factors of the strong economic
growth in Spain
2. Point out the dissequilibriums and their consequences
for the continuity of growth
3. Discuss some of the consequences that: a) financial
deregulation, b) increasing bank competition and b)
monetary unification may have for (regional) economic
growth (in Spain)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
1. The determinants of economic boom: 1994-2006
Internal
Short-term price-competitiveness gains
Peseta devaluations
Employment adjustment and labour productivity growth 1990-1993
SALDO EXTERIOR
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
1. The determinants of economic boom: 1994-2006
Internal
Short-term price-competitiveness gains
Peseta devaluations
Employment adjustment and labour productivity growth 1990-1993
Low wages and inflation
Inmigrants labour force (low wages and demand estimulus)
EXTRANJEROS (% TOTAL POBLACIÓN)
CRECIMIENTO SALARIAL (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
1. The determinants of economic boom: 1994-2006
External
A new baseline model (EMU)
Inflations expectations / Exchange-rate risk / Stability Pact /
Cohesion Funds …
Low interest rates
New investment opportunities (housing and property market)
Banks’ market estrategies
TIPOS DE INTERÉS A CORTO PLAZO, %
TIPOS DE INTERÉS A LARGO PLAZO, %
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
1. The determinants of economic boom: 1994-2006
External
A new baseline model (EMU)
Low interest rates
Expansion of bank credit
Competition for the market share
Easier access to international financial markets
CRECIMIENTO INTERANUAL DEL PIB Y EL CRÉDITO (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2. The dissequilibriums of expansion
Dissequilibriums
CURRENT ACCOUNT (MILES DE EUROS)
 Excess demand
Inflation differential
Current account deficit
Necesidades de financiación
INFLATION (%)
CAPACIDAD (+)/NECESIDAD (-) FINANCIACIÓN (% PIB)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Dissequilibriums
2. The dissequilibriums of expansion
 Excess demand
 Sectoral unbalances: housing and construction vs tradeables and open to
international competition
 Lack of non-price competitiveness
 Labour productivity stagnation
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2. The dissequilibriums of expansion
Dissequilibriums
 Excess demand
 Sectoral unbalances: housing and construction vs tradeables and open to
international competition
 Lack of non-price competitiveness
 Labour productivity stagnation
 High busines cycle sensitiveness of job creation (temporal contracts and
construction sector)
TASA DE TEMPORALIDAD (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2. The dissequilibriums of expansion
Dissequilibriums
 Excess demand
 Sectoral unbalances: housing and construction vs tradeables and open to
international competition
 Lack of non-price competitiveness
 Labour productivity stagnation
 High busines cycle sensitiveness of job creation (temporal contracts and
construction sector)
 Soft-capitalization (investment in housing)
 Credit expansion and concentration in housing market
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
EVOLUCIÓN DEL CRÉDITO CONCEDIDO POR LAS
ENTIDADES DE CRÉDITO A OSR, 1995-2009
(AÑO 1995 BASE 100)
EVOLUCIÓN DEL CRÉDITO DESTINADO A
“CONSTRUCCIÓN Y VIVIENDA”, 1995-2009
(% SOBRE EL TOTAL DE CRÉDITO CONCEDIDO A OSR)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2. The dissequilibriums of expansion
 Excess demand
Dissequilibriums
 Sectoral unbalances: housing and construction vs tradeables and open to
international competition
 Lack of non-price competitiveness
 Labour productivity stagnation
 High busines cycle sensitiveness of job creation (temporal contracts and
construction sector)
 Soft-capitalization (investment in housing)
 Credit expansion and concentration in housing market
 … The (false and) incredible belief taht (for being part of EMU) Spain had
no more Balance of Payments nor “funding” problems
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2.1. The dissequilibrium consequences
RIQUEZA DE LOS HOGARES (%)
Consequences
 (Price) competitiveness loss
 Increasing financial vulnerability
and systemic risk (micro and
macro perspectives)
DEUDA SOBRE RBD, FAMILIAS (%)
INVERSIÓN RESIDENCIAL
DEUDA SOBRE EBE, SNF (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2.1. The dissequilibrium consequences
Consequences
 (Price) competitiveness loss
 Increasing financial vulnerability and systemic risk (micro and macro
perspectives)
 Unbalanced sectoral growth (housing and construction) reinforces
pro-cyclicality
 The continuity of the boom depends on price expectations for housing
market and bank credit availability
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2.1. The dissequilibrium consequences
Facts
 … but the price of houses stop rising (fortunatelly)
VARIACIÓN INTERANUAL PRECIO DE VIVIENDA LIBRE (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2.1. The dissequilibrium consequences
Facts
 … but the price of houses stop rising (fortunatelly)
 … and the credit stop flowing fluently (unfortunatelly for the non
speculative agents) from 2006
VARIACIÓN INTERANUAL CRÉDITO A OSR (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
EVOLUCIÓN DE LA DUDOSIDAD, 1998-2009 (%)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
2.1. The dissequilibrium consequences
Facts
 … but the price of houses stop rising (fortunatelly)
 … and the credit stop flowing fluently (unfortunatelly for the non
speculative agents)
 … and “the Spanish party came to its end”
Source: The Financial Times
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
3. The economic policy response to recession in Spain
Short term
1. Fiscal and income policies  to stimulate the aggregate demand
2. Public support for funding (ICO)  to facilitate access to private
funding for at least working capital
3. Labour market deregulation  to reduce costs (wages) and
facilitate firms' adjustment
1. Structural change  to increase global competitiveness
Long term
2. Banking consolidation  a new “banking map” … what for?
3. Monetary conditions more adequate for Spain  the ECB has set
an interest rate too low for the Spanish economy (…)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
INDICE DE CONDICIONES MONETARIAS
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
28
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
3. The economic policy response to recession in Spain
Short term
1. Fiscal and income policies  to stimulate the aggregate demand
2. Public support for funding (ICO)  to facilitate access to private
funding for at least working capital
3. Labour market deregulation  to reduce costs (wages) and
facilitate firms' adjustment
1. Structural change  to increase global competitiveness
Long term
2. Banking consolidation  a new “banking map” … what for?
3. Monetary conditions more adequate for Spain  the ECB has set
an interest rate too low for the Spanish economy
4. A new and better regulation for financial markets  there is the
conviction that financial distress was due to a bad functioning of
the market not the result of its “internal logic”
Will they work? Are they really sufficient or
necessary conditions for the recovery?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Will they work? Are they really sufficient or
necessary conditions for the recovery?



Fiscal and income policies  they won’t last for long (increasing public debt)


Structural change  how to do it? Easier saying than doing
Public funding (ICO)  good but … very small scale
Labour market “deregulation”  labour market “frictions” did not really cause the
crisis / labour market deregulation is not a sufficient condition but the (only?)
variable that government can manipulate in the short run to restore price
competitiveness
Banking consolidation  Spain has a sound banking system … and consolidation
may be counterproductive for economic growth (…)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Banking consolidation ideas …
 Are there “too many” banks in Spain?
 Not “big enough” Spanish banks? What’s the proper size for a bank to
have?
 To answer these questions we have to set first another one  What’s a
bank for? What’s the role of banks?
 Bank credit vs financial markets  Does it matter?
 Financial efficiency vs functional efficiency  What is best? Re both
possible?
 Proximity and relationship lending  Does it make a difference for
long run economic (and regional) growth?
 What does the evidence tell us about the causality between finance and
economic growth?
 Data (cross-section correlations) vs “History” (…)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
“despite their weaknesses, local financial institutions
were able to tap into local information networks and so
extend credit to firms that were too young or small to
secure
funds
from
large
regional
or
national
institutions. In addition, by raising the return to savings for
local households, they helped to mobilize significant new
resources for economic development.”
Source: Cull, Robert, Davis, Lance E., Lamoreaux, Naomi R.
and Rosenthal, Jean-Laurent (2005), Historical Financing of
Small- and Medium-Sized Enterprises. NBER Working Paper
No. 11695.
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Banking consolidation ideas … (cont.)
 What does determine credit availability?
 Is it only the bank’s ability (bank’s size or banking development) to
lend?
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Banking consolidation ideas … (cont.)
 What does determine credit availability?
 Is it only the bank’s ability (bank’s size or banking development) to
lend?
 Why is it then that the credit availability pattern is so unstable in
Spain despite having a developed banking system?
Bank credit growth and GDPpc by regions.
Expansion (1985-1990)
Bank credit growth and GDPpc by regions.
Recession (1991-1993)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
34
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Banking consolidation ideas … (cont.)
 What does determine credit availability?
 Is it only the bank’s ability (bank’s size or banking development) to
lend?
 Why is it then that the credit availability pattern is so unstable in
Spain despite having a developed banking system?
 Credit availability depends on supply and demand
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
35
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Banking consolidation ideas … (cont.)
 What does determine credit availability?
 Is it only the bank’s ability (bank’s size or banking development) to
lend?
 Why is it then that the credit availability pattern is so unstable in
Spain despite having a developed banking system?
 Credit availability depends on supply and demand
 If so, then a bigger and more developed banking system is not a
sufficient condition to assure a elastic sypply of credit at all times
 Credit cyles might be better understood if we consider the interaction
between the stages of banking development (V. Chick) and the
financial unstability hipothesis (H. Mysnky)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
36
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Will they work? Are they really sufficient or
necessary conditions for the recovery?



Fiscal and income policies


Structural change

Financial regulation  is it really feasible a global regulation? Will it be
effective to avoid credit cycles or financial bubbles / maybe credit cycles
and financial bubbles are to some extent unavoidable: a natural
consequence of an individual profit seeking behavior …

Monetary conditions more adequate for Spain  there have been
always differences … and the Bank of Spain seemed not to care about it
Public funding (ICO)
Labour market “deregulation”
Banking consolidation
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
37
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
ITM según la regla de Taylor para las regiones españolas
Período pre-UEM
Período UEM
(respecto a España, en p.p.)
(respecto a UEM, en p.p.)
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
38
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
Will they work? Are they really sufficient or
necessary conditions for the recovery?



Fiscal and income policies


Structural change

Financial regulation  is it really feasible a global regulation? Will it be
effective to avoid credit cycles or financial bubbles / maybe credit cycles
and financial bubbles are to some extent unavoidable: a natural
consequence of an individual profit seeking behavior …

Monetary conditions more adequate for Spain  there have been
always differences … and the Bank of Spain seemed not to care about it
Public funding (ICO)
Labour market “deregulation”
Banking consolidation
The relevant is to think of a new role for monetary and financial policy

Has inflation targeting worked? What causes inflation?

Monetary policy and financial stability

The regulation of credit creation and expansion
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
39
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
4. What will happen?
 The recession is still here … but the economy will recover (sooner or later)
 The problem is that some policy measures (such as the restructuring of
banking) may have relevant consequences for future economic growth,
particularly for some regions
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
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From the lasting boom to the severe current recession. The Spanish economy 1994-2009
“Be sure you understand this …
before maximizing your function”
The total means more than the
sum of the parts
… and every part can only make
sense if located in the proper
place
The maximization of some parts
can result in an inadequate Bull’s
shape
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
41
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PKSG WORKSHOP ON THE CURRENT CRISIS
SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON
FROM THE LASTING BOOM TO THE SEVERE CURRENT
RECESSION. THE SPANISH ECONOMY 1994-2009
Carlos J. Rodríguez-Fuentes
[email protected]
David Padrón Marrero
[email protected]
University of La Laguna
Department of Applied Economics
Campus de Guajara – 38071
Canary Islands - Spain
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
42
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
43
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
44
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
45
From the lasting boom to the severe current recession. The Spanish economy 1994-2009
PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London
46