Economic Crisis - Chances for Spain

BY: EURO CRISIS Greece forces laggards to act!

With Greece currenlty under close observation of international investors, Spain also has come under increased levels of observation. This is good for Spain, as it provides more certainty about the future. The Spanish government cannot afford to further lose international credibility; a credibility which Greece, never had. This is the foremost important difference between the Euro laggards.
While the Greek government engaged in creative accounting techniques, already before entering the Euro monetary union, Spain started from a very different position, with a much higher level of credibility. This is important as we are in the midst of a crisis of trust and those institutions and countries which lose the trust of their investors, will ultimatley fail. A bail-out will only delay the end, but in most cases not avert the pending failure.
The differences in the Euro zone become now more and more obvious. The criticism on the European Currency Union was always focused on the point of diversity, which is reflected by the different needs of its member states..
At this moment of time Spain will face a new type of crisis. Before entering the monetary Union, currency devaluations were the method of choice to enforce the required adjustments. The Spanish government historically chose  monetary policy adjustments to manage the economic issues.

Infrastructural adjustments and innovation initiatives were not required. The housing boom, which lead to the largest housing bubble in the history of the country, is based on exactly on this failure to recognize the need for economic development in terms of innovation. The current crisis therefore is most likely a unique chance for Spain. A chance to enforce change and reform to and outdated economic environment. But it also bears the threat of falling back into the idea of becoming the low wage country, it had been before entering the European Union. This is not an option. Too much of the Dutch Disease has taken hold of the Spanish society. 
Spains wealth is built mainly on the real estate and tourism boom over the last decades. The chance of becoming Europe’s Silicon Valley was foregiven by seeking its chance as Europe’s Miami. The big issue for Spain and Europe is that there is no room for a Miami type of economy, during a depression.
The Monetary Union sets a new framework for all European economies, with the Exception of Greece. As the president of the European central Bank Jean-Claude Trichet stated “The help of Europe to its member state is always ex-ante”, which means that the help was already there and countries made choices to benefit from this help in one or the other way.
Spain now has to persue very fast a way in which it can differentiate itself from Greece. Investors and European leaders need to gain the impression that Spain wants to become a new motor for growth in Europe, or it sets itself up to follow the footsteps of Greece. This would be tragic, as the Spanish economy has a much better starting position.
The best which could happen to Spain is that Greece will be expelled from the Euro, The worst which could happen to Spain is that Greece will be kept alive within the Euro Zone. If Greece remains in the Euro, it will ultimately pull significant resources from all European Economies. And those economies which are already struggeling will not have the resources to make the neccesary adjustments. On top of that, a bail-out of Greece will cause higher levels of Deflation. Spain however has to avoid deflation or deleveraging at any cost. The current trends in the Eurozone’s economic environment show a tendency for Deflation which is a much larger threat to the European economies than inflation. Inflation is still not in sight, or will not be the detreminant factor in maintaining the economic activities above critical levels.

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