1. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 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. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 2 Spanish economy 1994-2009 Long-lasting strong expansion (1994-2006) High and stable growth High and stable growth GDP GROWTH (%)

3. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 3 Spanish economy 1994-2009 High and stable growth High and stable growth Intense job creation Intense job creation Long-lasting strong expansion (1994-2006)

4. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 4 Spanish economy 1994-2009 High and stable growth High and stable growth Intense job creation Intense job creation Macroeconomic stability Macroeconomic stability DÉFICIT PÚBLICO (% PIB)DEUDA PÚBLICA (% PIB)INFLACIÓN (%) Long-lasting strong expansion (1994-2006)

5. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 5 Unexpected severe recession (2007-2009) Spanish economy 1994-2009 High and stable growth High and stable growth Intense job creation Intense job creation Macroeconomic stability Macroeconomic stability Long-lasting strong expansion (1994-2006) Strong reduction in growth Strong reduction in growth GDP GROWTH (%)

6. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 6 Unexpected severe recession (2007-2009) Spanish economy 1994-2009 High and stable growth High and stable growth Intense job creation Intense job creation Macroeconomic stability Macroeconomic stability Long-lasting strong expansion (1994-2006) Strong reduction in growth Strong reduction in growth Job destruction and increasing unemployment Job destruction and increasing unemployment UNEMPLOYMENT RATE (%) EMPLOYMENT GROWTH (%)

7. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 7 Unexpected severe recession (2007-2009) Spanish economy 1994-2009 High and stable growth High and stable growth Intense job creation Intense job creation Macroeconomic stability Macroeconomic stability Long-lasting strong expansion (1994-2006) Strong reduction in growth Strong reduction in growth Job destruction and increasing unemployment Job destruction and increasing unemployment Rising public deficit Rising public deficit DÉFICIT PÚBLICO (% PIB)DEUDA PÚBLICA (% PIB)

8. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 8 Unexpected severe recession (2007-2009) Spanish economy 1994-2009 High and stable growth High and stable growth Intense job creation Intense job creation Macroeconomic stability Macroeconomic stability Long-lasting strong expansion (1994-2006) Strong reduction in growth Strong reduction in growth Job destruction and increasing unemployment Job destruction and increasing unemployment Rising public deficit Rising public deficit What went wrong for this to happen?

9. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 9 Nothing did really went wrong; the financial crisis acelerated its end … but the recession was inevitable to some extent Nothing did really went wrong; the financial crisis acelerated its end … but the recession was inevitable to some extent The only problem is that: The only problem is that: Minsky was right … once again Minsky was right … once again Strong economy … but: a)the accumulation of dissequilibriums b)the financial crisis interrupted (temporarily?) growth The failure was therefore two-fold: a)Internal the understimation of the macroeconomic dissequilibriums b)Exogenous the regulation failure that lead to an increasing systemic risk that later collapsed the functioning of credit markets Did something really went wrong in Spain?

10. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 10 PRESENTATION STRUCTURE 1. Identify the underlying factors of the strong economic growth in Spain 2. Point out the dissequilibriums and their consequences for the continuity of growth 3. 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. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 11 1. The determinants of economic boom: 1994-2006 Internal Short-term price-competitiveness gains Peseta devaluations Employment adjustment and labour productivity growth 1990-1993 SALDO EXTERIOR

12. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 12 1. The determinants of economic boom: 1994-2006 Internal 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) EXTRANJEROS (% TOTAL POBLACIÓN)CRECIMIENTO SALARIAL (%)

13. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 13 1. The determinants of economic boom: 1994-2006 External 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 TIPOS DE INTERÉS A CORTO PLAZO, % TIPOS DE INTERÉS A LARGO PLAZO, %

14. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 14 1. The determinants of economic boom: 1994-2006 External A new baseline model (EMU) Low interest rates Expansion of bank credit Competition for the market share Easier access to international financial markets CRECIMIENTO INTERANUAL DEL PIB Y EL CRÉDITO (%)

15. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 15 2. The dissequilibriums of expansion Dissequilibriums Excess demand Inflation differential Current account deficit Necesidades de financiación INFLATION (%)CAPACIDAD (+)/NECESIDAD (-) FINANCIACIÓN (% PIB) CURRENT ACCOUNT (MILES DE EUROS)

16. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 16 2. The dissequilibriums of expansion Dissequilibriums Excess demand Sectoral unbalances: housing and construction vs tradeables and open to international competition Lack of non-price competitiveness Labour productivity stagnation

17. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 17 2. The dissequilibriums of expansion Dissequilibriums 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) TASA DE TEMPORALIDAD (%)

18. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 18 2. The dissequilibriums of expansion Dissequilibriums 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

19. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 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. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 20 2. The dissequilibriums of expansion Dissequilibriums 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

21. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 21 2.1. The dissequilibrium consequences Consequences (Price) competitiveness loss Increasing financial vulnerability and systemic risk (micro and macro perspectives) INVERSIÓN RESIDENCIAL DEUDA SOBRE RBD, FAMILIAS (%) DEUDA SOBRE EBE, SNF (%) RIQUEZA DE LOS HOGARES (%)

22. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 22 2.1. The dissequilibrium consequences 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

23. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 23 2.1. The dissequilibrium consequences Facts … but the price of houses stop rising (fortunatelly) VARIACIÓN INTERANUAL PRECIO DE VIVIENDA LIBRE (%)

24. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 24 2.1. The dissequilibrium consequences Facts … but the price of houses stop rising (fortunatelly) … and the credit stop flowing fluently (unfortunatelly for the non speculative agents) from 2006 VARIACIÓN INTERANUAL CRÉDITO A OSR (%)

25. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 25 EVOLUCIÓN DE LA DUDOSIDAD, 1998-2009 (%)

26. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 26 2.1. The dissequilibrium consequences Facts … 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 Source: The Financial Times

27. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 27 3. The economic policy response to recession in Spain 1.Fiscal and income policies to stimulate the aggregate demand 2.Public support for funding (ICO) to facilitate access to private funding for at least working capital 3.Labour market deregulation to reduce costs (wages) and facilitate firms' adjustment Short term Long term 1.Structural change to increase global competitiveness 2.Banking consolidation a new banking map … what for? 3.Monetary conditions more adequate for Spain the ECB has set an interest rate too low for the Spanish economy (…)

28. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 28 INDICE DE CONDICIONES MONETARIAS

29. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 29 3. The economic policy response to recession in Spain 1.Fiscal and income policies to stimulate the aggregate demand 2.Public support for funding (ICO) to facilitate access to private funding for at least working capital 3.Labour market deregulation to reduce costs (wages) and facilitate firms' adjustment Short term Long term 1.Structural change to increase global competitiveness 2.Banking consolidation a new banking map … what for? 3.Monetary conditions more adequate for Spain the ECB has set an interest rate too low for the Spanish economy 4.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 Will they work? Are they really sufficient or necessary conditions for the recovery?

30. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 30 Fiscal and income policies they wont last for long (increasing public debt) Fiscal and income policies they wont last for long (increasing public debt) Public funding (ICO) good but … very small scale 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 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 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 (…) Banking consolidation Spain has a sound banking system … and consolidation may be counterproductive for economic growth (…) Will they work? Are they really sufficient or necessary conditions for the recovery?

31. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 31 Banking consolidation ideas … Are there too many banks in Spain? Are there too many banks in Spain? Not big enough Spanish banks? Whats the proper size for a bank to have? Not big enough Spanish banks? Whats the proper size for a bank to have? To answer these questions we have to set first another one Whats a bank for? Whats the role of banks? To answer these questions we have to set first another one Whats a bank for? Whats the role of banks? Bank credit vs financial markets Does it matter? Bank credit vs financial markets Does it matter? Financial efficiency vs functional efficiency What is best? Re both possible? Financial efficiency vs functional efficiency What is best? Re both possible? Proximity and relationship lending Does it make a difference for long run economic (and regional) growth? Proximity and relationship lending Does it make a difference for long run economic (and regional) growth? What does the evidence tell us about the causality between finance and economic growth? What does the evidence tell us about the causality between finance and economic growth? Data (cross-section correlations) vs History (…) Data (cross-section correlations) vs History (…)

32. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 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.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. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 33 What does determine credit availability? What does determine credit availability? Is it only the banks ability (banks size or banking development) to lend? Is it only the banks ability (banks size or banking development) to lend? Banking consolidation ideas … (cont.)

34. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 34 What does determine credit availability? What does determine credit availability? Is it only the banks ability (banks size or banking development) to lend? Is it only the banks ability (banks size or banking development) to lend? Why is it then that the credit availability pattern is so unstable in Spain despite having a developed banking system? Why is it then that the credit availability pattern is so unstable in Spain despite having a developed banking system? Banking consolidation ideas … (cont.) Bank credit growth and GDPpc by regions. Expansion (1985-1990) Bank credit growth and GDPpc by regions. Recession (1991-1993)

35. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 35 What does determine credit availability? What does determine credit availability? Is it only the banks ability (banks size or banking development) to lend? Is it only the banks ability (banks size or banking development) to lend? Why is it then that the credit availability pattern is so unstable in Spain despite having a developed banking system? Why is it then that the credit availability pattern is so unstable in Spain despite having a developed banking system? Credit availability depends on supply and demand Credit availability depends on supply and demand Banking consolidation ideas … (cont.)

36. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 36 What does determine credit availability? What does determine credit availability? Is it only the banks ability (banks size or banking development) to lend? Is it only the banks ability (banks size or banking development) to lend? Why is it then that the credit availability pattern is so unstable in Spain despite having a developed banking system? Why is it then that the credit availability pattern is so unstable in Spain despite having a developed banking system? Credit availability depends on supply and demand Credit availability depends on supply and demand If so, then a bigger and more developed banking system is not a sufficient condition to assure a elastic sypply of credit at all times If so, then a bigger and more developed banking system is not a sufficient condition to assure a elastic sypply of credit at all times Credit cyles might be better understood if we consider the interaction between the stages of banking development (V. Chick) and the financial unstability hipothesis (H. Mysnky) Credit cyles might be better understood if we consider the interaction between the stages of banking development (V. Chick) and the financial unstability hipothesis (H. Mysnky) Banking consolidation ideas … (cont.)

37. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 37 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 … 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 Monetary conditions more adequate for Spain there have been always differences … and the Bank of Spain seemed not to care about it Will they work? Are they really sufficient or necessary conditions for the recovery? Fiscal and income policies Fiscal and income policies Public funding (ICO) Public funding (ICO) Labour market deregulation Labour market deregulation Structural change Structural change Banking consolidation Banking consolidation

38. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 38 Período pre-UEM (respecto a España, en p.p.) ITM según la regla de Taylor para las regiones españolas Período UEM (respecto a UEM, en p.p.)

39. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 39 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 … 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 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? Has inflation targeting worked? What causes inflation? Monetary policy and financial stability Monetary policy and financial stability The regulation of credit creation and expansion The regulation of credit creation and expansion Will they work? Are they really sufficient or necessary conditions for the recovery? Fiscal and income policies Fiscal and income policies Public funding (ICO) Public funding (ICO) Labour market deregulation Labour market deregulation Structural change Structural change Banking consolidation Banking consolidation

40. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 40 The recession is still here … but the economy will recover (sooner or later) 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 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 4. What will happen?

41. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 41 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 Bulls shape Be sure you understand this … before maximizing your functionBe sure you understand this … before maximizing your function

42. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 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

43. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 43

44. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 44

45. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 45

46. PKSG Workshop on the Current Crises. SOAS, University of London, 23rd October 2009, London From the lasting boom to the severe current recession. The Spanish economy 1994-2009 46