http://krugman.blogs.nytimes.com/2009/01/19/the-pain-in-spain/
Paul Krugman - New York Times Blog
January 19, 2009, 4:22 pm
The pain in Spain ...
... isn't hard to explain. Spain was basically Florida, with a housing
bubble inflated by both resident and holiday purchases, and now the
bubble has burst.
But Spain is in worse shape than Florida, for two reasons -- reasons
familiar to anyone who was involved in the great debate about whether
the euro was a good idea.
First, Europe doesn't have a central government; Spain, unlike Florida,
can't draw on Social Security and Medicare checks from Washington. So
the burden of recession falls entirely on the local budget -- hence the
country's declining credit rating.
Second, the United States has a more or less geographically integrated
labor market: workers move from distressed regions to those with better
prospects. (The housing bust has, however, reduced mobility because
people can't sell their houses.) Europe does not: yes, there's a fair
bit of mobility both among the elite and among low-wage workers at the
bottom, but nothing like the US level.
So what can Spain do? It needs to become more competitive -- but it
can't have a devaluation, because it's a euro country. So the only
alternative is wage cuts, which are desperately hard to achieve (and
create big problems for debtors.)
Contrary to what everyone seemed to be saying even a few weeks ago,
being a member of the eurozone doesn't immunize countries against
crisis. In Spain's case (and Italy's, and Ireland's, and Greece's) the
euro may well be making things worse.
And Britain's plunging pound, unpopular though it is, may turn out to
have been a very good thing.