http://economywatch.msnbc.msn.com/_n...utmk=187396776
A quick summary of the MSNBC article --
1. Exuberance due to low borrowing costs in the early part of the European common currency experiment, resulting in large capital investments in Spain from other portions of Europe, much of which was led by banks around Europe. Much of the exuberance was caused by misreading risks -- investors figured that Spanish investment was the same as German investment.
2. Which caused a big real estate / housing boom in Spain.
3. When the bubble burst, and the economy contracted, the investors pulled their money out of the Spanish economy.
4. As millions of Spaniards lost their jobs (current unemployment is twice that of the US, with young people even higher) government revenues plummeted.
5. As the government started cutting spending to deal with lower revenue, that caused even more job losses. Austerity measures proved to be counter-productive, and as Spanish government spending dropped, revenues dropped faster.
6. Bond yields are climbing, as the time needed for a reasonable economic recovery seems longer and longer, and as Spanish sovereign default looms.
7. Spain seems unable to fix this themselves, and there's a reason why: they don't have their own currency. They don't have a Fed that can backstop their banks and be the lender of last resort.
8. The long-term fix is for Spain to cut prices -- but to cut prices it needs to cut wages, and that's a very difficult problem. Wages are sticky; they are difficult to cut across the whole Spanish economy. Once again, the common currency is the root of the problem. If Spain had its own currency, it could allow it to devalue, effectively cutting the country's wages without having to physically cut the wages of all of its citizens.
A final point: at no point does the article mention high taxes, or people unwilling to work. In fact the article lays more blame on investors misreading risk than on Spanish worker laziness or entitlements.
Tying this back to home: this scenario is similar to the US -- our economy was wrecked by risky trading of mortgage-backed securities that resulted in a housing bubble that burst when investors misread the risks. The good news is that we have stabilized our banks, which now have enough liquidity to weather this de-leveraging of private debt, and there is no risk of sovereign default. Investors are signaling their agreement with that by accepting historically low yields on Treasuries. However, our economy still has millions of people out of work -- through no fault of theirs -- and our revenues are suffering as a result, and you know the rest of my argument.
And thank goodness we have our own currency, and a Fed that can intervene to prevent disaster.