Spain, the Euro and a Crisis

Cajas de ahorro were a kind of regional savings banks. They resembled the Landesbanken in Germany, where the top management was usually politicians (not in the sense of holding office in government, but in the sense of being active in a political party). In Germany the Landesbanken made dubious overseas investments because the management was operating beyond its level of competency, while in Spain the management of the cajas de ahorro funded local real estate developers, often without the sufficient arm’s length separation from the clients’ activities.

Although some articles make much of the lack of religious freedom, this must be qualified. Article 6 of the first chapter of the Fuero de los españoles of 1945 states: La profesión y práctica de la Religión Católica, que es la del Estado español, gozará de la protección oficial. El Estado asumirá la protección de la libertad religiosa, que será garantizada por una eficaz tutela jurídica que, a la vez, salvaguarde la moral y el orden público. In practice, this meant that religions other than Catholicism were restricted to the private sphere. This is the current policy towards all religions in Quebec and France. It had not been so in Communist Europe, where party power was used both to eradicate opposition and to avenge petty resentments. Although many academics and intellectuals continued to extol the advantages of Marxism in general and the Soviet regime in particular, the most basic intelligence could not fail to inform Western governments of the reality of life under Stalin. Further, although Stalin seemed to put most of his efforts into subjugating the Soviet Union, the International continued to be an active presence in the politics of most Western nations. Even if most local Marxists and “harder” socialist parties were more a threat to each other than to the entrenched parties in most nations, the proselytizing nature of the Marxist revolution was known to most governments, which responded by seeking to contain it. The Berlin Wall stood high and clear as a testimony that beyond lay a regime very different from those of the West. Spain had nearly come to have this same political system. Thus, the staunch anti-bolshevism of Franco’s Spain was understandable, and it was also convenient outcome for Western Europe that otherwise would have found itself squeezed between two sources of Marxist revolution, on the Northeast and Southwest.

Effective results of the two kinds of government correspond poorly with the discourses of those governments. The same can be seen, for example, in the USA where Republican governments, with their discourse of small government and free enterprise, typically have been associated with increased federal budgets representing a larger part of the economy than is the case with Democratic governments. In Spain, the major economic indicator of this paradox was the measure of unemployment. Spain since Franco’s time has been characterized by remarkably high level of unemployment. The lowest level of unemployment occurred under the Partido Popular of Aznar—what journalists would call a right-wing government. When the socialist regime (PSOE) took over after Aznar blamed Basque terrorists for the 2004 Madrid bombings, the unemployment rate began to rise: it continued to rise until the financial crisis of 2007, it continued to rise on through that crisis, the onset of the euro crisis and continued to 2013, after which it began to decrease with the Partido Popular back in power. In the end, however, little can be demonstrated with the data, since the number of instances of alternating governments is so low, the delay between discourse, action and effects upon the economy so debatable, and the impact of the economic trends outside of Spain so exaggeratedly marked.

Tony Judt tells us that “Spain, which very quickly lost any comparative advantage that accrued to it from being one of Western Europe’s more backward economies, shed 600,000 jobs in the 20 years following the transition to democracy. At the height of the recession of the mid-1990s, 44 percent of the country’s under-25 workforce was unemployed.” (Judt 2005, chapter XXII).

Scarcity of non-risky assets is an avowal of ignorance about alternative assets. The problem for investors is threefold: risk, uncertainty and cost of analysis and governance. Risk is a function of the ignorance of the investor with respect to a project, in contrast to uncertainty that is inherent in the project independent of the level of knowledge of the investor. If non-risky assets seem scarce, then the solution is for the investor to educate himself or herself about alternative assets. This leads to the problem of cost in learning about alternative assets. The cost of analysis and governance is the typical problem of microfinance: small investments bring a high rate of return (e.g., a bicycle can multiple the productivity of an African farmer bringing produce to market), but the size of the transaction is modest compared to the effort of analysing the loan proposal and policing its repayment.

This expression is linked to Alan Greenspan (1996), but the concept is even older. The business literature, for example, uses the term capital market myopia (Sahlman and Stevenson 1985, p. 7), a more rigorous and defined concept than the quarter century more venerable marketing myopia (Levitt 1960) where firms continue to invest after the market has changed.

Completing the circle of influence, the developer could play golf with the director of the local cajas de ahorro that both financed the developer and provided the mortgage to the house purchaser. Of course, this relation did not depend upon the liberalization of the professions.

Those pages—dva-lawyers.​com—were no longer accessible in October 2014 although still listed on Google.

The present author noted a similar phenomenon (although with different dynamics) in the US housing bubble (Macdonald 2012), and this suggests that the term “bubble” covers at least two kinds of price increases: the pure bubble of increased price for a static commodity, and mixed bubbles where some of the price increase involves a migration to higher quality. It seems probable that these two kinds of bubbles have different dynamics. Studies of financial and economic bubbles would gain by revisions that take this distinction into account. Of course, even a move to higher quality remains a bubble if the market does not have the financial capacity to comply with the complete terms of the transactions. The trick lies in the time dimension of financial transactions: as long as the bubble continues to expand, the market can comply with the terms of transactions. For example, in the USA, increasing market prices allowed purchasers to flip houses and surf from smaller to larger mortgages.

Sebastián Royo has pointed out that the Bank of Spain was at best timid in overseeing the cajas. Caruana (governor of the Bank of Spain 2000–2006) foresaw the dangers and admonished the cajas but acted no more strongly. Fernández Ordóñez (2006–2012) was critical of the over-importance of the construction sector until he became governor. See Royo (2013, pp. 171–175).

Note: Complete references to unsigned IMF and OECD documents are given in the text and are not repeated here.