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PKSG WORKSHOP ON THE CURRENT CRISIS SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON

PKSG WORKSHOP ON THE CURRENT CRISIS SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON. FROM THE LASTING BOOM TO THE SEVERE CURRENT RECESSION. THE SPANISH ECONOMY 1994-2009. Carlos J. Rodríguez-Fuentes cjrodrig@ull.es David Padrón Marrero dpadron@ull.es University of La Laguna

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PKSG WORKSHOP ON THE CURRENT CRISIS SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON

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  1. PKSG WORKSHOP ON THE CURRENT CRISIS SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON FROM THE LASTING BOOM TO THE SEVERE CURRENT RECESSION. THE SPANISH ECONOMY 1994-2009 Carlos J. Rodríguez-Fuentes cjrodrig@ull.es David Padrón Marrero dpadron@ull.es University of La Laguna Department of Applied Economics Campus de Guajara – 38071 Canary Islands - Spain

  2. GDP GROWTH (%) Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) • High and stable growth

  3. Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) • High and stable growth • Intense job creation

  4. Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) • High and stable growth • Intense job creation • Macroeconomic stability DÉFICIT PÚBLICO (% PIB) DEUDA PÚBLICA (% PIB) INFLACIÓN (%)

  5. Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) Unexpected severe recession(2007-2009) High and stable growth Intense job creation Macroeconomic stability • Strong reduction in growth GDP GROWTH (%)

  6. Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) Unexpected severe recession(2007-2009) High and stable growth Intense job creation Macroeconomic stability • Strong reduction in growth • Job destruction and increasing unemployment EMPLOYMENT GROWTH (%) UNEMPLOYMENT RATE (%)

  7. Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) Unexpected severe recession(2007-2009) High and stable growth Intense job creation Macroeconomic stability • Strong reduction in growth • Job destruction and increasing unemployment • Rising public deficit DÉFICIT PÚBLICO (% PIB) DEUDA PÚBLICA (% PIB)

  8. Spanish economy1994-2009 Long-lasting strong expansion(1994-2006) Unexpected severe recession(2007-2009) High and stable growth Intense job creation Macroeconomic stability Strong reduction in growth Job destruction and increasing unemployment Rising public deficit What went wrong for this to happen?

  9. Did something really went wrong in Spain? • Strong economy … but: • the accumulation of dissequilibriums • the financial crisis interrupted (temporarily?) growth • The failure was therefore two-fold: • Internal  the understimation of the macroeconomic dissequilibriums • Exogenous  the “regulation failure” that lead to an increasing systemic risk that later collapsed the functioning of credit markets • Nothing did really went wrong; the financial crisis acelerated its end … but the recession was inevitable to some extent • The only problem is that: • Minsky was right … once again

  10. PRESENTATION STRUCTURE Identify the underlying factors of the strong economic growth in Spain Point out the dissequilibriums and their consequences for the continuity of growth Discuss some of the consequences that: a) financial deregulation, b) increasing bank competition and b) monetary unification may have for (regional) economic growth (in Spain)

  11. 1. The determinants of economic boom: 1994-2006 Short-term price-competitiveness gains Peseta devaluations Employment adjustment and labour productivity growth 1990-1993 Internal SALDO EXTERIOR

  12. 1. The determinants of economic boom: 1994-2006 Short-term price-competitiveness gains Peseta devaluations Employment adjustment and labour productivity growth 1990-1993 Low wages and inflation Inmigrants labour force (low wages and demand estimulus) Internal EXTRANJEROS (% TOTAL POBLACIÓN) CRECIMIENTO SALARIAL (%)

  13. 1. The determinants of economic boom: 1994-2006 A new baseline model (EMU) Inflations expectations / Exchange-rate risk / Stability Pact / Cohesion Funds … Low interest rates New investment opportunities (housing and property market) Banks’ market estrategies External TIPOS DE INTERÉS A CORTO PLAZO, % TIPOS DE INTERÉS A LARGO PLAZO, %

  14. 1. The determinants of economic boom: 1994-2006 A new baseline model (EMU) Low interest rates Expansion of bank credit Competition for the market share Easier access to international financial markets External CRECIMIENTO INTERANUAL DEL PIB Y EL CRÉDITO (%)

  15. 2. The dissequilibriums of expansion CURRENT ACCOUNT (MILES DE EUROS) • Excess demand • Inflation differential • Current account deficit • Necesidades de financiación Dissequilibriums INFLATION (%) CAPACIDAD (+)/NECESIDAD (-) FINANCIACIÓN (% PIB)

  16. 2. The dissequilibriums of expansion • Excess demand • Sectoral unbalances: housing and construction vs tradeables and open to international competition • Lack of non-price competitiveness • Labour productivity stagnation Dissequilibriums

  17. 2. The dissequilibriums of expansion • Excess demand • Sectoral unbalances: housing and construction vs tradeables and open to international competition • Lack of non-price competitiveness • Labour productivity stagnation • High busines cycle sensitiveness of job creation (temporal contracts and construction sector) Dissequilibriums TASA DE TEMPORALIDAD (%)

  18. 2. The dissequilibriums of expansion • Excess demand • Sectoral unbalances: housing and construction vs tradeables and open to international competition • Lack of non-price competitiveness • Labour productivity stagnation • High busines cycle sensitiveness of job creation (temporal contracts and construction sector) • Soft-capitalization (investment in housing) • Credit expansion and concentration in housing market Dissequilibriums

  19. EVOLUCIÓN DEL CRÉDITO CONCEDIDO POR LAS ENTIDADES DE CRÉDITO A OSR, 1995-2009(AÑO 1995 BASE 100) EVOLUCIÓN DEL CRÉDITO DESTINADO A “CONSTRUCCIÓN Y VIVIENDA”, 1995-2009(% SOBRE EL TOTAL DE CRÉDITO CONCEDIDO A OSR)

  20. 2. The dissequilibriums of expansion • Excess demand • Sectoral unbalances: housing and construction vs tradeables and open to international competition • Lack of non-price competitiveness • Labour productivity stagnation • High busines cycle sensitiveness of job creation (temporal contracts and construction sector) • Soft-capitalization (investment in housing) • Credit expansion and concentration in housing market • … The (false and) incredible belief taht (for being part of EMU) Spain had no more Balance of Payments nor “funding” problems Dissequilibriums

  21. 2.1. The dissequilibrium consequences RIQUEZA DE LOS HOGARES (%) • (Price) competitiveness loss • Increasing financial vulnerability and systemic risk (micro and macro perspectives) Consequences DEUDA SOBRE RBD, FAMILIAS (%) INVERSIÓN RESIDENCIAL DEUDA SOBRE EBE, SNF (%)

  22. 2.1. The dissequilibrium consequences • (Price) competitiveness loss • Increasing financial vulnerability and systemic risk (micro and macro perspectives) • Unbalanced sectoral growth (housing and construction) reinforces pro-cyclicality • The continuity of the boom depends on price expectations for housing market and bank credit availability Consequences

  23. 2.1. The dissequilibrium consequences • … but the price of houses stop rising (fortunatelly) Facts VARIACIÓN INTERANUAL PRECIO DE VIVIENDA LIBRE (%)

  24. 2.1. The dissequilibrium consequences • … but the price of houses stop rising (fortunatelly) • … and the credit stop flowing fluently (unfortunatelly for the non speculative agents) from 2006 Facts VARIACIÓN INTERANUAL CRÉDITO A OSR (%)

  25. EVOLUCIÓN DE LA DUDOSIDAD, 1998-2009 (%)

  26. 2.1. The dissequilibrium consequences • … but the price of houses stop rising (fortunatelly) • … and the credit stop flowing fluently (unfortunatelly for the non speculative agents) • … and “the Spanish party came to its end” Facts Source: The Financial Times

  27. 3. The economic policy response to recession in Spain Fiscal and income policies  to stimulate the aggregate demand Public support for funding (ICO)  to facilitate access to private funding for at least working capital Labour market deregulation  to reduce costs (wages) and facilitate firms' adjustment Short term • Structural change  to increase global competitiveness • Banking consolidation  a new “banking map” … what for? • Monetary conditions more adequate for Spain  the ECB has setan interest rate too low for the Spanish economy (…) Long term

  28. INDICE DE CONDICIONES MONETARIAS

  29. 3. The economic policy response to recession in Spain Fiscal and income policies  to stimulate the aggregate demand Public support for funding (ICO)  to facilitate access to private funding for at least working capital Labour market deregulation  to reduce costs (wages) and facilitate firms' adjustment Short term • Structural change  to increase global competitiveness • Banking consolidation  a new “banking map” … what for? • Monetary conditions more adequate for Spain  the ECB has setan interest rate too low for the Spanish economy • A new and better regulation for financial markets  there is the conviction that financial distress was due to a bad functioning of the market not the result of its “internal logic” Long term Will they work? Are they really sufficient or necessary conditions for the recovery?

  30. Will they work? Are they really sufficient or necessary conditions for the recovery? • Fiscal and income policies  they won’t last for long (increasing public debt) • Public funding (ICO)  good but … very small scale • Labour market “deregulation”  labour market “frictions” did not really cause the crisis / labour market deregulation is not a sufficient condition but the (only?) variable that government can manipulate in the short run to restore price competitiveness • Structural change  how to do it? Easier saying than doing • Banking consolidation  Spain has a sound banking system … and consolidation may be counterproductive for economic growth (…)

  31. Banking consolidation ideas … • Are there “toomany” banks in Spain? • Not “bigenough” Spanishbanks? What’sthepropersizefor a banktohave? • Toanswerthesequestionswehaveto set firstanotherone What’s abankfor? What’sthe role of banks? • Bank creditvsfinancialmarkets Doesitmatter? • Financialefficiencyvsfunctionalefficiency  Whatisbest? Re bothpossible? • Proximity and relationshiplending  Doesitmake a differenceforlongruneconomic (and regional) growth? • Whatdoestheevidencetellusaboutthecausalitybetweenfinance andeconomicgrowth? • Data (cross-sectioncorrelations) vs “History” (…)

  32. “despite their weaknesses, local financial institutions were able to tap into local information networks and so extend credit to firms that were too young or small to secure funds from large regional or national institutions. In addition, by raising the return to savings for local households, they helped to mobilize significant new resources for economic development.” Source: Cull, Robert, Davis, Lance E., Lamoreaux, Naomi R. and Rosenthal, Jean-Laurent (2005), Historical Financing of Small- and Medium-Sized Enterprises. NBER Working Paper No. 11695.

  33. Banking consolidation ideas … (cont.) • Whatdoes determine creditavailability? • Isitonlythebank’sability (bank’ssizeorbankingdevelopment) tolend?

  34. Bankingconsolidation ideas … (cont.) • Whatdoes determine creditavailability? • Isitonlythebank’sability (bank’ssizeorbankingdevelopment) tolend? • Whyisitthenthatthecreditavailabilitypatternis so unstable inSpaindespitehaving a developedbankingsystem? Bank credit growth and GDPpc by regions. Recession (1991-1993) Bank credit growth and GDPpc by regions. Expansion (1985-1990)

  35. Banking consolidation ideas … (cont.) • Whatdoes determine creditavailability? • Isitonlythebank’sability (bank’ssizeorbankingdevelopment) tolend? • Whyisitthenthatthecreditavailabilitypatternis so unstable inSpaindespitehaving a developedbankingsystem? • Creditavailabilitydependsonsupply and demand

  36. Banking consolidation ideas … (cont.) • Whatdoes determine creditavailability? • Isitonlythebank’sability (bank’ssizeorbankingdevelopment) tolend? • Whyisitthenthatthecreditavailabilitypatternis so unstable inSpaindespitehaving a developedbankingsystem? • Creditavailabilitydependsonsupply and demand • If so, then a bigger and more developedbankingsystemisnot asufficientconditiontoassure a elasticsypply of credit at all times • Creditcylesmightbebetterunderstoodifweconsidertheinteractionbetweenthestages of bankingdevelopment (V. Chick) and thefinancialunstabilityhipothesis (H. Mysnky)

  37. Will they work? Are they really sufficient or necessary conditions for the recovery? • Fiscal and income policies • Public funding (ICO) • Labour market “deregulation” • Structural change • Banking consolidation • Financial regulation  is it really feasible a global regulation? Will it be effective to avoid credit cycles or financial bubbles / maybe credit cycles and financial bubbles are to some extent unavoidable: a natural consequence of an individual profit seeking behavior … • Monetary conditions more adequate for Spain  there have been always differences … and the Bank of Spain seemed not to care about it

  38. ITM según la regla de Taylor para las regiones españolas Período UEM (respecto a UEM, en p.p.) Período pre-UEM (respecto a España, en p.p.)

  39. Will they work? Are they really sufficient or necessary conditions for the recovery? • Fiscal and income policies • Public funding (ICO) • Labour market “deregulation” • Structural change • Banking consolidation • Financial regulation  is it really feasible a global regulation? Will it be effective to avoid credit cycles or financial bubbles / maybe credit cycles and financial bubbles are to some extent unavoidable: a natural consequence of an individual profit seeking behavior … • Monetary conditions more adequate for Spain  there have been always differences … and the Bank of Spain seemed not to care about it The relevant is to think of a new role for monetary and financial policy • Has inflation targeting worked? What causes inflation? • Monetary policy and financial stability • The regulation of credit creation and expansion

  40. 4. What will happen? • The recession is still here … but the economy will recover (sooner or later) • The problem is that some policy measures (such as the restructuring of banking) may have relevant consequences for future economic growth, particularly for some regions

  41. “Be sure you understand this … before maximizing your function” The total means more than the sum of the parts … and every part can only make sense if located in the proper place The maximization of some parts can result in an inadequate Bull’s shape

  42. PKSG WORKSHOP ON THE CURRENT CRISIS SOAS, UNIVERSITY OF LONDON, 23RD OCTOBER 2009, LONDON FROM THE LASTING BOOM TO THE SEVERE CURRENT RECESSION. THE SPANISH ECONOMY 1994-2009 Carlos J. Rodríguez-Fuentes cjrodrig@ull.es David Padrón Marrero dpadron@ull.es University of La Laguna Department of Applied Economics Campus de Guajara – 38071 Canary Islands - Spain

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