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28 May 2012

From Grexit to Spexit

Is ‘Spexit’ a word yet? We've already got ‘Grexit’ – a reference to the widely expected Greek exit from the Eurozone. But the appearance of Spexit in the headlines would herald an altogether bigger crisis – an impending Spanish exit from the Eurozone.

Writing for EconoMonitor, Michael Pettis argues that Spain will soon have no choice but to leave. The basic problem is as follows:

  • “…thanks to excessively loose monetary policies driven primarily by German needs over the past decade, Spain has made itself wholly uncompetitive in the global markets and in so doing has run large current account deficits for nearly the entire past decade… its savings rate has collapsed, its cost structure forced up, its debt levels soared, and a great deal of investment directed into projects, mostly real estate, that were not economically viable.”

If Spain can’t continue to borrow its way out of trouble (due to the interest rates demanded by the money markets), then it must earn its way out of trouble – which would require one of three things to happen:

  • “[Option 1], Germany and the other core countries can take steps to reverse the policies that led to the European crisis… [Option 2], Spain can force austerity and tolerate high unemployment for many more years as wages are slowly pushed down and pricing excesses are ground away… [Option 3], Spain, can leave the Euro and devalue…”

The first option means a massive transfer of wealth from northern to southern Europe, so the Germans won’t agree to it. The second option is even worse (from a Spanish viewpoint) as it amounts to deliberate deflation – disastrous for any economy, but suicidal for one as debt-laden as Spain’s. That just leaves the third option – depart (the Eurozone), devalue (the currency) and default (on Spanish debt).

So, unless the Germans give in and give away their money, a Spexit looks unavoidable – with all that implies for anyone the Spanish owe money too. Time (and not much of it) will tell.

But, for now, one final thought from Mr Pettis:

  • “As an aside I will add that France is for me the dividing line between countries that will be forced into devaluation and restructuring and those that won’t – in my opinion France could go either way…”

‘Frexit’, anyone?


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