Economic Crisis Looms Larger In Spain Than Greece

Jun 4, 2012
Originally published on June 4, 2012 7:44 pm



With Greece set to elect a new parliament in a couple of weeks and opt either to stick with the euro under tough conditions or revert to its own national currency, attention turns to Spain. Spanish banks are under stress, lack of confidence has driven up the government's borrowing costs, unemployment there is huge. What's the difference between Greece and Spain? Well, a flippant answer might be a few months, but in fact, there are differences of scale and how they fell into economic crisis.

Joining us now is Fred Bergsten. He's the director of the Peterson Institute for International Economics. Welcome to the program once again.

FRED BERGSTEN: Good to be here.

SIEGEL: And first, how much bigger a problem is the Spanish crisis than the Greek crisis?

BERGSTEN: A lot bigger. Spain is five or six times as big as Greece. Greece only accounts for 2 to 3 percent of the entire Eurozone economy. Spain, by contrast, is the fourth biggest, after Germany, France and Italy, so this is a much different magnitude and therefore a much more serious problem.

SIEGEL: Greece is often faulted for running recklessly high budget deficits, even misrepresenting its economics situation to its European partners. Spain very different, I gather.

BERGSTEN: Spain is a very different kettle of fish. It's debt to GDP ratio is less than Germany's. It's export expansion over the last five to 10 years has been faster than Germany's. Spain has one big problem. It had a banking crisis due to a housing bubble burst, the same as in the United States and on a smaller scale in Ireland. It's got to fix its banks. Doing that will cost the government some money, which will add to its budget problem. But it's first, foremost and almost in totality a banking crisis. And we know how to fix those.

SIEGEL: What caused their housing bubble? There's enough discussion of what caused ours, why did it happened in Spain?

BERGSTEN: Spain had the great short-term advantage, when they joined the Eurozone, of a dramatic decline in interest rates. The financial markets viewed all of the Eurozone countries as roughly equal in terms of credit risks; that even included Greece. It certainly included Spain. They got market interest rates as low as Germany's, which was far below anything they had before, amounted to a huge subsidy to their homeowners borrowing to buy housing.

And so you had a huge housing boom fueled by credit expansion, even greater than we had in the United States. That, of course, turned out to be folly because Spain did have higher credit risks than Germany. But that gave them a false market signal, which really prompted the boom, and eventually then the housing bust.

SIEGEL: Periodically, we hear people talking about what kind of window there is for averting a crisis in one troubled European economy or the other. In the case of Spain, what is the clock ticking down to? What's the flashpoint that they would approach?

BERGSTEN: It's hard to say the exact moment, but the immediate problem is a bank run. If a bank run gets out of control, you have to shut banks, you get bankruptcies; the economy really grinds to a halt. That was very much the fear here in the United States after Lehman collapsed in 2008.

Therefore, any delay is risky. And the Europeans really do need to move very quickly and very powerfully, with very large amounts of financial support to avoid the risk that the situation gets out of hand and even spills over Spain's borders to the Eurozone more broadly.

SIEGEL: In discussion of the Greek crisis, the question always is, would Greece dropout of a euro and revert to the drachma, which it then could devalue if necessary. In Spain, is there any comparable discussion of abandoning the euro?

BERGSTEN: As far as I know, there is no discussion in Spain of dropping out of the euro. It would be folly for them to do it. They would have to take the same kind of bank risk you measure outside the Eurozone as inside it. And, in fact, Spain's competitiveness has been quite adequate. They have had more rapid export growth than Germany over the last five to 10 years.

They do not need a devaluation to correct their problems. Their problems are really focused on the banking sector, and that's why a financial rescue is the answer to their difficulties.

SIEGEL: Well, Fred Bergsten, thanks a lot for talking with us about Spain.

BERGSTEN: Good to talk.

SIEGEL: Fred Bergsten is director of the Peterson Institute for International Economics.


SIEGEL: This is ALL THINGS CONSIDERED from NPR News. Transcript provided by NPR, Copyright National Public Radio.