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Home Publications Blogs Beat the Press Spain's "Debt Crisis" Was Created by the ECB

Spain's "Debt Crisis" Was Created by the ECB

Saturday, 03 March 2012 09:07

The NYT had an article on how Spain is struggling to both reduce its deficits to address its debt crisis and try to simultaneously promote growth. It would have been worth pointing out that Spain's debt crisis is almost entirely a result of the European Central Bank's policy.

By explicitly refusing to act as a lender of last resort and imposing austerity conditions on Spain and other euro zone countries, the ECB has raised questions in financial markets about Spain's ability to pay its debt. Spain had been running budget surpluses before the crisis and its debt to GDP ratio remains below that of the UK, the United States and many other countries that have no difficulty borrowing in financial markets.

Comments (9)Add Comment
ECB Nonsense
written by Charley James, March 03, 2012 8:50
Apparently, reporters and editors at The New York Times don't read their own Paul Krugman on this subject or they wouldn't have made such a hideous, misleading mistake. Dr. Krugman has written extensively - at both his blog and his column - about how the ECB's refusal to be a lender of last resort has created massive market problems for Spain and a few other nations in the Eurozone. Prior to the crisis, Spain was a fiscally healthy country that the ECB has dragged into the middle of a crisis that the bank is helping to make worse.
Blame the Euro and unbalanced trade
written by votersway, March 03, 2012 6:41
One currency DOES NOT FIT ALL. Especially in Europe, where Brussels and the ECB (in Germany) are doing everything to make the peripheral countries dump site for German and French products.

These countries need their own currencies to be able to devalue and fix the harmful effects of unbalanced trade. Down with the Euro and the corruption it produces.
endless crime promotion
written by genauer, March 04, 2012 3:45
Everybody who knows only a little bit about the ECB and the Maastricht Treaty, knows perfectly well, that the ECB is not allowed to be a Lender of last Resort to countries.
What is the purpose of this endless promotion of fundamental crime by the CEPR in general and Suspect Baker specifically ?
total debt levels
written by "MoreLiver", March 04, 2012 3:55
Spain was not a fiscally healthy country - it had a private debt bomb that has exploded, and just like in all the other cases in the past, the private sector's unsustainable debt came to haunt the public sector through unemployment, bank bailouts and lower tax revenues. A very shallow and populistic writing - don't you have any economists working in CEPR?
written by David, March 04, 2012 5:24
Dear MoreLiver,

Knowing how CEPR and Dean Baker in particular has been criticizing his own government and other mainstream economists for not recognizing the US housing bubble I am pretty sure it wouldn't take me long before I find one similar comment on Spain, that had a very similar phenomenon.

The fact that CEPR and Dean speaks about the ECB is because that is what goes on now, and also in reaction to the NYT which obsesses with the debt in a fashion that lets readers think that this was the result of irresponsible fiscal policy.

You obviously have not read any of the material in CEPR which is available to anyone who wants to comment on it. However you challenge it with such arrogance strong words that you give the impression you know everything about everything. Don't be so shallow, that hurts the debate.
written by Calgacus, March 04, 2012 4:45
Genauer, the ECB is insane. The Maastricht treaty is insane. The ECB & Maastricht are the fundamental crime, in violent opposition to many other, more fundamental treaties, not the time-honored & sound lender-of-last resort idea.

The Maastricht treaty incorporates 2+2=3, water-freezes-when-heated economics into a legal document. Economics & accounting that makes astrology look very good, makes Jeanne Dixon look like Albert Einstein. Of course the treaty must continually be "violated", must be stretched, especially in the crisis caused by this suicide pact treaty. If the ECB had not been acting as "the lender of last resort to countries", however disguised & rationalized as "legal", the Euro would have collapsed already. (Good riddance!) Because the ECB operates in the real world. And in the real world, no matter how many times a treaty says 2+2=3, no matter how many moron-neoclassical economists say it is 3, two plus two is four, not three.
ECB and Politicos
written by Desde Spain, March 05, 2012 3:13
Yes, the ECB induced Spanish bubble and its burst.
The housing market in Spain was reaching levels -and still has levels- in towns of 300K people at prices of Manhattan, ie San Sebastian or Bilbao. I know Bruce Springteen would say the town is worth every penny.
Hell of a bubble at $1500 sq ft. very few places can obtain mortgages at those prices anymore.
So the ECB forced the tightening measures but also created the problem by let the LIBOR to be the bench mark of lending prices with variable rates as standard accepted practice. Say, a standard mortgage 5 years ago in Spain had a VAR rate of 2.2% all thanks to the ECB sotto voce agreement to bail out banks in case of trouble. It allowed the fees to roll in and the spreads to collapse, and the bank were all very happy.
Today, the story has changed, hopefully now I can buy that house in Marbella that I was admiring for such long time. Thanks to the social warfare against the taxpayers.

written by Alex, March 08, 2012 8:34
Well, I don't think the problem would just dissolve - and probably many are really into targeting the ECB, debts, etc.

housing crisis
written by Tricia, March 10, 2012 5:11
These data about Spain are alarming. I think many young people are those who suffer most. Unemployment brings huge problems with housing, so we need to face housing crisis as well. Recently, I have found out about very interesting concept called rent-to-own. It looks like a good option for people who are not so much well-off. Apart of flexibility of terms, there's new feeling of independence as you start really live on your onw, at your own place. Young people need it.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.