Q: How did the economic crisis in Spain come about?
The crisis in Spain has been very difficult, but it is a part of the Eurozone crisis, which, in turn, is part of the global financial crisis that began in the United States in 2008. If the crisis in the Eurozone has lasted longer than it has in the U.S., that is because there were flaws in the design of the common currency. Those flaws proved very serious when we had to guarantee the economic and common currency unions.
Q: What should we look for to know if Spain is making an economic recovery in the short, medium, and long term?
One key data point will be a reduction of the risk premium—the interest rate the Treasury pays in relation to German bonds—to a reasonable number. We also look for growth to return. But the ultimate test is job creation, which continues to be the most costly aspect of the crisis.
A reasonable hope would be that the coalition government in Germany might push demand, economic activity, and expansion, letting the recovery consolidate bit by bit.
Q: What institutional changes need to be made for a sustainable recovery in Spain?
The monetary union is in a process of revision, a process that has effectively gone back to constituent components. The design had many problems from its creation, and, surely it will have to move forward as a fiscal union, a union of shared responsibility around debt, and of course, an economic union. But in the end it is a political union. And a political union is what the Eurozone needs and is surely what it will functionally come to be, though that depends largely on the decisions of the German government, since it has very strong leadership in the whole Eurozone.
The necessary institutional changes for the currency, and for everything else, point in one direction: towards greater unity related to fiscal, monetary, economic, and debt policies.
Q: Have the euro and the European Union been good for Spain overall?
From a political perspective, the European Union is, perhaps, the most important civilizing undertaking of the 20th century. We are 27 nations united in support of peace and democracy. In a relatively short period of time, the process has created an economic union and a common market with a common currency.
The euro is an essential part of the European Union project. It has been in use for more than 10 years. That is enough time to have demonstrated its weaknesses, but, in that same period of time, Spain has become Europe. Spain does not understand itself without Europe, and Europe will not continue to make sense if it does not advance towards greater unity.
Initially, the euro was a means to progress and development, access to markets, easy financing, and a strong currency. Now, in this crisis, it has become a restriction, a constriction. But I am convinced there is no other way forward except through the euro and the European Union.
Q: What’s the current state of the recovery for Spain? What external actions would be helpful?
There is some good news for Spain. The economies where we have the most commercial relationships are growing. That means exports are expanding, which helps offset the reduced domestic consumer demand, which has been hurt by the high level of debt in the Spanish economy.
In terms of external help, what would be most useful would be the European Union taking the necessary steps to extend monetary policy and turn the European Central Bank into a system similar to the North American Federal Reserve System.
From Spain’s perspective, we can draw two lessons from the crisis. The first is that the monetary unions need to be what economists call an optimal currency area. Done in half measures, a monetary union is at risk of imbalances and hard crises like the one we’re living through. The second lesson is that we need to have more control of the debt process, especially private debt. For a time, debt and leverage of large enterprises were seen as reasonable, as long as it was used to expand markets or increase investment. However, from what we’ve gone through in Spain, we can see that those processes must be managed in a careful, controlled manner.
Q: Finally, what do you get out of interactions with students in a place like Yale?
First, Yale is one of the most prestigious universities of the world. It is always satisfying to be able to exchange perspectives and to know what issues are on the minds of the members of the university’s community.
In terms of what I get, it’s a benefit to me, in the first place to know what they know, and what they think about the political processes, politics, economics, and the economics of markets. Second, it is the opportunity for me to explain and share my experiences with markets and governments in a world that is become harder and harder to fully comprehend. It has grown wider as a result of globalization. The world is now a place where uncontrollable swings in markets are more frequent and will only become more so.
It is an opportunity to raise questions about the strengths and weaknesses of various policies, the weaknesses and many strengths of markets, and how we can ensure that the interaction between politics and markets become more constructive and more creative in order to provide more stability.