1. Crises in currency unions: Spain Laurent K. Frey E809: International Monetary and Financial Systems

2. Crises in currency unions: Spain 1. Recent Developments 2. Origins of the crisis / Spain and the Euro 3. Solutions (in regard to past events)

3. 1. Recent Developments ECB LTROs € 489 billion in December 2011 € 529 billion in February 2012 Source: Financial Times

4. 10 YR Spanish Government Bonds Source: Bloomberg

5. 2. Origins of the Spanish Crisis « Spain’s fiscal problems are a consequence of its depression, not its cause » Paul Krugman - Capital inflows / bonanzas - Housing market bubble - Banking / Financial crisis

6. 2. Origins of the Crisis « Spain’s fiscal problems are a consequence of its depression, not its cause » Paul Krugman - Recession - Housing prices - Expectations - Debt crisis?

7. 2. Spain and the Euro « Members of a currency union issue debt in a currency over which they have no control » Paul de Grauwe - The nature of a currency union - Central Bank as lender of last resort

8. 3. Solutions (in regard to past events) « Well, in the 1930s – an era that modern Europe is starting to replicate in ever more faithful detail – the essential condition for recovery was exit from the gold standard » Paul Krugman Solution 1: Quit the Euro zone Depreciation of national currency enables economic growth = end of vicious circle But: - Debt remains in Euro - Conversion ? - Lacking competitiveness

9. 3. Solutions (in regard to past events) « Well, in the 1930s – an era that modern Europe is starting to replicate in ever more faithful detail – the essential condition for recovery was exit from the gold standard » Paul Krugman Solution 2: Political and Monetary Union Central budget mechanism, automatic transfer system and common fiscal authority. Compensation for the austerity programs But: - Unfeasible politically - Against EU law - Equity?

10. 3. Solutions (in regard to past events) « Well, in the 1930s – an era that modern Europe is starting to replicate in ever more faithful detail – the essential condition for recovery was exit from the gold standard » Paul Krugman Solution 3: The Role of the ECB Extensive monetary policy Inflation vs. Deflation Lender of last resort But: - Do we really want inflation? Source: Moneythatworks.org

11. Comments / Discussion