When Willem Buiter, Citigroup’s chief economist, stated that Spain is at greater risk of default than ever before, the internet blogs and comment sections of Spanish newspapers immediately filled up with dark conspiracy theories.
"The Anglo-Saxons have it in for Spain," offered one. "They are jealous; they could never accept Spain’s astonishing economic performance in the last 25 years," ran another.
For was Citibank not itself rescued by US taxpayers, while no large Spanish bank has needed help? Did the UK not need to save RBS and Lloyds at large cost, as UK Financial Investments has acknowledged? Did the UK and US not suffer from a worse form of the same illness as Spain, namely a massive credit-fuelled housing bubble that left behind a chronically over-indebted private sector?
The answers, of course, are yes, yes and yes. You cannot fault Spaniards for believing these conspiracy theories. And yet there is at least one pretty solid economic reason why Spain’s trouble is much, much worse than what the UK and the US are suffering: the euro.
While the UK and the US can borrow in their own currencies, Spain must borrow in euros. And as Paul de Grauwe – coincidentally the inheritor of Buiter’s old chair at the LSE (more conspiracy theory fodder?) – has put it, the euro has converted developed countries such as Spain and Italy into developing ones, exposed to periodic sudden stops.
If the UK cannot face its obligations, it can choose to partially monetise them, causing a depreciation of the pound and an increase in competitiveness that helps to bring back growth. If Spain faces the same problem, it must raise interest rates to keep lenders on board, which kills growth and makes the lack of confidence worse, putting in motion a brutal vicious circle.