With falling GDP and house prices, Spanish banks have been running the risk of failure. Indeed, the Spanish government has already had to agree to bail out Spain’s fourth biggest bank, Bankia.
On Saturday 9 June, at a crisis conference call, eurozone finance ministers agreed to lend the Spanish government up to €100 billion to provide credit to Spanish banks. The Spanish government is commissioning independent audits of the banks and, in the light of that, will specify just how much it needs to borrow.
Details of the nature of the loans will be made clear over the coming days, but they will funded either from the temporary rescue fund, the European Financial Stability Facility (EFSF), or from the new permanent fund that will replace it, the European Stability Mechanism (ESM).
But whilst the loans will remove the immediate pressure on Spanish banks, the underlying problems of the Spanish economy remain. Easy credit fuelled a property bubble which then burst. House prices have fallen by over 20% since the peak, and many Spanish people are in negative equity. Many construction companies have gone out of business.
What is more, the Spanish government is committed to reducing the budget deficit from 8.9% of GDP in 2011 to 5.3% in 2012 and 3% in 2013. To achieve this it has instituted tough austerity policies of government expenditure cuts and tax rises. (Click here for a link to a graph from the BBC of budget deficits in 18 EU countries.)
This has only aggravated the decline in GDP – at least in the short term. Spanish GDP is set to fall by around 2% this year and unemployment, at nearly 25% and rising, is the highest in Europe. Indeed the unemployment rate for those aged 15 to 25 is over 51%! This clearly has profound social and political consequences, with many young people seeing no prospect of gaining employment and thus feeling socially alienated. (For a PowerPoint of the above chart, click here.)
Markets on the Monday after the bailout was announced initially reacted positively. By the end of the day, however, the gains had been wiped out. Although no conditions were imposed on the Spanish government – the loan, although to the Spanish government, was to bail out the banks, not the government itself – worries remain that the Spanish economy is not set to recover for some time.
What is more, worries about other eurozone countries in difficulty have not gone away. Indeed, with the Spanish government being seen as having been dealt with more leniently than the Greek, Portuguese and Irish governments, investors are now worried that these countries may demand to renegotiate the terms of their bailout. And in the case of Greece, the Spanish bailout may make people more willing to vote in this coming Saturday’s election for parties that reject the Greek bailout terms. This may make it more likely that Greece will be forced to leave the euro, with all the chaos that is likely to ensue.
Webcasts and Podcasts
Spain: Simmering anger in Seville BBC News, Paul Mason (7/6/12)
Will Spain’s Bailout save Europe? CNBC Video, Martin Wolf (11/6/12)
Bailout boost evaporates Financial Times video, James Macintosh (11/6/12)
Spain’s bailout may not be enough Financial Times video, Nikki Tait (11/6/12)
Eurozone: ‘Italy will be next’ BBC Today Programme, Robert Peston (11/6/12)
Articles
Eurozone agrees to lend Spain up to 100 billion euros MSN Money, Jan Strupczewski and Julien Toyer (12/6/12)
Hurried Spanish banking bailout fails to calm market nerves Guardian, Giles Tremlett (11/6/12)
Fears that Spain’s bailout relief may be short-live Independent, Alasdair Fotheringham and Tom Bawden (11/6/12)
Spanish banks deal: Market concerns remain BBC News (11/6/12)
Q&A: Spanish bank deal BBC News (11/6/12)
Debt crisis: Market euphoria evaporates over Spain’s €100bn bank bailout The Telegraph, Emma Rowley and Bruno Waterfield (11/6/12)
Why bondholders are scared about Spain MarketWatch, Deborah Levine (11/6/12)
Krugman on another bank bailout Press-Telegram Paul Krugman (11/6/12)
Messy Spanish rescue BBC News, Robert Peston (10/6/12)
This latest euro fix will come apart in less than a month The Telegraph, Jeremy Warner (11/6/12)
The consequences of Spain’s bank rescue Financial Times, Gavyn Davies (10/6/12)
Buy on the summit, sell on the communiqué Financial Times, Alan Beattie (11/6/12)
The vicious euro circle keeps turning BBC News, Stephanie Flanders (12/6/12)
Spanish banks need up to 62bn euros BBC News (21/6/12)
Eurozone crisis explained BBC News (19/6/12)
Spain formally requests a bailout for its banks BBC News (25/6/12)
Documents and press releases
IMF Says Spain’s Core Financial System is Resilient, but Important Vulnerabilities Remain IMF Press Release (8/6/12)
Spain and the IMF IMF links to various documents including: Spain – Financial System Stability Assessment (8/6/12)
Eurogroup statement on Spain Eurozone Portal, The Eurogroup (9/6/12)
Questions
- How does the Spanish bailout differ from those for Greece, Irelend and Portugal?
- What are the likely implications for Spanish borrowing costs of the loans coming from the ESM?
- To what extent does the plan to bail out Spanish banks involve a moral hazard?
- What is likely to be the effect of the Spanish bailout on Greece, Ireland and Portugal?
- How bad is Spanish public-sector debt compared with other countries? What is the likely effect of the bailout on Spanish public-sector debt?
- What is meant by a banking union in the eurozone and how would it work? What would be the implication of a eurozone banking union for the UK?
Paul Volcker was Chair of the US Federal Reserve from 1979 to 1987. He was also Chair of the Economic Recovery Advisory Board under President Barack Obama from February 2009 to January 2011. In the webcast and articles below, he reflects on the current state of the world financial system – from regulation, to the euro crisis, to world imbalances, to the system of floating exchange rates.
He argues that global financial systems are vulnerable to breakdowns. What is needed is reform to the system, and for that there needs to be consensus by politicians, regulators and central banks.
But, in the absence of international consensus on some key points, reform will be greatly weakened, if not aborted. The freedom of money, financial markets and people to move – and thus to escape regulation and taxation – might be an acceptable, even constructive, brake on excessive official intervention, but not if a deregulatory race to the bottom prevents adoption of needed ethical and prudential standards.
Perhaps most important is a coherent, consistent approach to dealing with the imminent failure of “systemically important” institutions. Taxpayers and governments alike are tired of bailing out creditors for fear of the destructive contagious effects of failure – even as bailouts encourage excessive risk-taking.
According to Volcker, countries must be prepared to surrender some sovereignty. Policies must be co-ordinated internationally and there must be stronger regulation by international bodies, such as the IMF and stronger concerted action by global organisations, such as the G20.
Left to their own devices, in an era of floating exchange rates, countries may pursue policies that exacerbate global imbalances.
Not so long ago, we were comforted by theorising that floating exchange rates would mediate international adjustments in a timely and orderly way. But, in the real world, many countries, particularly but not limited to small, open economies, simply find it impractical or undesirable to permit their currency to float.
We are left with the certainty, however awkward, that active participation in an open world economy requires some surrender of economic sovereignty. Or, to put the point more positively, it requires a willingness to co-ordinate policies more effectively.
Webcast
Volcker Urges Global Monetary System Overhaul BloombergBusinessweek (31/5/12)
Articles
Is global financial reform possible? Guardian, Paul Volcker (6/6/12)
Volcker Urges Global Financial System Overhaul After Crisis BloombergBusinessweek, Robyn Meredith and Shamim Adam (31/5/12)
Questions
- What reforms, according to Volcker, need to be implemented in order for the euro to function effectively without crises?
- What can the USA do to ease the euro crisis?
- What are Volcker’s views on the regulation of the US banking system?
- How are incentive structures in banks related to speculative activities?
- Should banks be allowed to fail?
- What financial imbalances exist between countries?
- What international monetary reforms are required?
- What light can game theory shed on the difficulty of achieving global policy co-ordination?
- Is an international system of floating exchange rates appropriate given the size of international financial flows?
A bumper olive crop in Spain would seem to be good news for Spanish olive growers. But the effect has been a fall in the prices of olives and olive oil. With 43% of the global supply, Spain is the world’s largest olive oil producer and changes in Spanish output have a big effect on the world price.
Premium extra virgin olive oil has fallen to its lowest level (even in nominal terms) since 2002. Today the price is around $2900 (£1850) a tonne in the wholesale market; in May 2006 it peaked at nearly $5854 – double today’s price.
And while this is bad news for Spanish farmers, for farmers in countries without bumper harvests, the low prices are even harder to bear.
The problem is being exacerbated by a fall in demand in many countries currently suffering recession, such as Greece, Portugal and Italy – all big olive oil consumers. Although olive oil prices have fallen, it is still more expensive than various substitutes. Many people are thus buying these cheaper alternatives, such as sunflower oil, especially for cooking.
What is more, cheaper substitutes for olive oil are increasing in supply. Take the case of rape seed oil in the UK. As the Mail Online article, linked to below, reports:
“UK rape planting is thought to have hit an all-time high this year as British farmers take advantage of the high prices being demanded for rapeseed – base ingredient of many vegetable oils and other edible oils.
Much of the UK crop is used by the local food industry, although some analysts are predicting strong UK yields will give farmers the opportunity to export more to Europe. Because of rising export demand, oil users in the UK claim there is little to indicate the price they are paying for rapeseed oil will drop substantially in the near future.”
The market for olive oil is global. Crop yields in one part of the world, both of olives and of substitute crops, affect global prices and hence growers’ incomes worldwide.
Webcast
Debt hit countries suffer from olive oil price dip Euronews (28/5/12)
News articles
Olive oil price slides as glut hits southern Europe Gulf News, Javier Blas (29/5/12)
Farmers feel squeeze as olive oil price slips The National, Gregor Stuart Hunter (29/5/12)
Olive oil surplus adds to economic pain in Spain The Week (29/5/12)
Olive oil price fall brings further pain for Spain, Italy and Greece The Telegraph (28/5/12)
Pass notes No 3183: Olive oil Guardian (28/5/12)
More Storage Aid for Virgin Olive Oil Olive Oil Times, Julie Butler (17/5/12)
Yellow Britain from the air: Rapeseed’s relentless march across the country pictured in vivid colour as farmers cash in after price of crop’s oil soars Mail Online, Sean Poulter (29/5/12)
Data
Commodity Prices Index Mundi
Olive Oil, extra virgin Monthly Price – US Dollars per Metric Ton Index Mundi
Questions
- Identify the factors that have contributed to the fall in the price of olive oil. Illustrate the effects on a demand and supply diagram.
- Explain what is meant by the fallacy of composition and how it relates to a price taker, such as a farmer.
- How do the price elasticities of demand and supply of olive oil help to explain the magnitude of the price fall?
- What developments in other vegetable oils are affecting the olive oil market? What determines the magnitude of these effects?
- What actions have been taken by the EU to support the olive oil market? Is this the most appropriate policy response?
- Why are Middle Eastern olive producers unable to compete on cost with the major EU producing countries?
Countries differ considerably in terms of the number of hours people work.
Despite the criticisms levelled at Greece, with some claiming that Greek workers are ‘lazy’, according to 2010 figures, the average worker in Greece worked 2109 hours per year – more than in any other European country. The average German worker worked 1419 hours and the average Dutch worker only 1377.
Internationally, amongst developed countries, Korea has the highest number of working hours per worker at 2193 per year. In the USA, the figure is 1778 hours and in the UK it’s 1647. (Click on chart below for a larger version.)
But working long hours does not mean working more productively. Generally the countries in which people work longer hours have lower output per hour.
The following podcast and articles look at the relationship between hours worked and productivity and consider which way the causality lies. They also look at related issues such as the proportion of part-time working and the length of annual paid holidays.
Podcast
Hardest Working Nations (also at) More or Less: BBC Radio 4, Tim Harford talks to Jon Messenger from the ILO (18/5/12)
Articles
Who works the longest hours? BBC News Magazine, Wesley Stephenson (23/5/12)
Are Greeks the hardest workers in Europe? BBC News Magazine, Charlotte McDonald (26/2/12)
Book
Working Time around the World ILO, Sangheon Lee, Deirdre McCann and Jon C. Messenger (Routledge, 2007)
Data
International Comparisons of Productivity – 2010 – Final Estimates: Statistical Bulletin ONS (6/3/12)
International Comparisons of Productivity – 2010 – Final Estimates: Data ONS (6/3/12)
Productivity Statistics OECD
Table 8: Average annual working time: Hours per worker Employment and Labour Markets, OECD
Questions
- Which countries tend to work the longest hours?
- Would cutting working hours, either through legislation or by agreement with companies, allow more people to be employed? Explain why it might be more complicated than this.
- What is the relationship between labour productivity per hour and the average number of hours worked per worker? Do people work longer hours because they are less productive or are they less productive because they work longer hours?
- Why factors determine labour productivity?
- Why may average hours worked be deceptive in terms of assessing how hard people are working?
- Why do US workers work more hours per year on average than UK workers?
Here’s a question that goes to the heart of economics and the social sciences generally: how desirable is the market system?
Our lives are dominated by markets. Whether in working or consuming, we operate in a market economy in which money is exchanged for goods or services. But also financial and product markets determine much of the structure of society, where most things seem to have a price.
But whilst, as a positive statement, we can say that money and markets are all around us, does that make them desirable? Markets provide signals and incentives; but are the signals the right ones? What are the incentives and how do we respond to them? And are these responses optimal?
You will probably have studied various ways in which markets fail to provide the optimal allocation of resources. But what are the limits of markets as a mechanism for social choices? And is there some more fundamental issue about the morality of a society that is organised around markets?
These are questions considered in the following podcast. It is an episode from BBC Radio 4’s Start the Week programme, hosted by Andrew Marr, with guests Michael Sandel, Diane Coyle and Grigory Yavlinksy. Here are the programme details:
Andrew Marr discusses the relationship between markets and morals with the political philosopher Michael Sandel. In his latest book, What Money Can’t Buy, Sandel questions the dominance of the financial markets in our daily lives, in which everything has a price. But the economist Diane Coyle stands up for her much maligned profession, and points to the many benefits of a market economy. The Russian economist Grigory Yavlinksy argues against viewing the world of money as separate from culture and society: he believes the financial crisis was merely a symptom of a wider moral collapse, and that it is time to examine the way we live.
(Links to the three contributors: Michael Sandel, Diane Coyle (see also), Grigory Yavlinsky.)
Podcast
Michael Sandel on Money and Morality BBC Start the Week programme (21/5/12)
Videos and articles
For a range of videos and articles on the morality of capitalism, see the previous post at:
We need to talk about Capitalism (28/1/12)
Questions
- What crises are there in current capitalism?
- What, according to Michael Sandel, is the difference between a market economy and a market society?
- Is the market society a relatively new phenomenon, or does it go back hundreds of years?
- To what extent is the greed expressed through markets and encouraged by markets affecting/infecting society and human relationships generally?
- What is the role of morality and trust in determining the desirability of market relationships?
- To what extent does a market economy allow people, rich and poor, to live separately from each other and not interact as joint members of society?
- What are the value systems promoted by marketisation? Should certain aspects of human life be outside these value systems?
- To what extent is the crisis of capitalism a crisis of economics?
- What policy alternatives are there for rebalancing society?
- What is the role of economists in advising on policy alternatives?
Details of the nature of the loans will be made clear over the coming days, but they will funded either from the temporary rescue fund, the European Financial Stability Facility (EFSF), or from the new permanent fund that will replace it, the European Stability Mechanism (ESM).
Markets on the Monday after the bailout was announced initially reacted positively. By the end of the day, however, the gains had been wiped out. Although no conditions were imposed on the Spanish government – the loan, although to the Spanish government, was to bail out the banks, not the government itself – worries remain that the Spanish economy is not set to recover for some time.
