The eurozone pain is mainly in Spain

In a previous post, I charted the employment losses for the G7 countries and noted that while the US was still bouncing along the trough of of a deep recession, the other countries were less badly-hit. But there was an important country missing from that graph - and it wouldn't have been included in a chart for the G20, either.

It turns out that even though only 14% of the people who use the euro live in Spain, the fall in Spanish employment accounts for 41.5% of the total eurozone losses since the peak in 2008Q3:

Here's a similar graph for the United States. I couldn't be bothered to do it for all 50 states, so I divided it up according to the 12 Federal Reserve districts. The data are not seasonally adjusted, so the employment losses are those between November 2007 and November 2009.

I must say that I was surprised by how close these data points were to the 45^o degree line. Most of the districts saw employment losses that were roughly proportional to their population. The most notable exceptions are the Dallas FRD (which did relatively well) and the Chicago and Atlanta FRDs, which were hardest hit by the collapse of manufacturing and the housing market, respectively.

Another surprise was that the San Francisco FRD was on the 45^o line. It turns out that although California was disproportionately hit by the recession, the rest of the district was not; the San Francisco FRD ex-California would be around where the New York FRD is plotted.

Much of the difference between these two graphs must be attributed to the fact that the United States has a federal government that can transfer tax revenues generated in Texas to finance spending in California. If the euro had been designed properly, German tax revenues would now be propping up Spanish aggregate demand. Instead, Germany is embarking on a program of austerity.

Spanish policy makers must be really, really sorry they adopted the euro.

Comments

[larry macdonald]

The lack of a fiscal union to go with the monetary union does lead one to wonder if the EU can be sustained. Simon Schama had a great article in the Financial Times May 22 (or so) on how public rage follows economic shocks with a lag – so it’s perhaps unwise to be lulled by the current calm.

[Guillaume]

Stephen, I'm no chart expert but my guess is that the projection amplifies the effect of larger countries and minimizes that of smaller countries. If Ireland were the same size as Spain, it would lie right under it and wouldn't hug the 45 degree line like it does now. Likewise, Austria would probably be better off or equal to France. The graphs are a little misleading, but let's be careful.

[Stephen Gordon]

Well, yes - Ireland must also be regretting its choice.

Then again, if it were only Ireland, the problem wouldn't be so severe: the resources for supporting Ireland wouldn't be much of a strain on the other 15 countries. But Spain is big, and that makes a difference.

[asp]

Spain may be able to feel better about itself if Germany was kicked out of the Euro.

[Stephen Gordon]

I suspect that there are many Germans who would gladly support leaving on their own accord.

[Jim Rootham]

Some German regions are working around the restraint of the Central Bank

http://news.bbc.co.uk/2/hi/6333063.stm

There have been local currency attempts all over the place. Some people tried it in Toronto (the LETS) a while ago. I would expect the pushback from the authorities would actually be higher in places like Greece and Spain where it would be more useful (since there would be more real threats of replacement in those places).

[Pierre]

Lower European labour mobility/wage flexibility must also play a role in explaining the differences between the two charts.

[Stephen Gordon]

Sure, but that would be more of a longer-run phenomenon. In the short run, labour isn't that mobile - especially if you can't sell your house...

[Nick Rowe]

It's actually a good thing you did it for the 12 Federal Reserve districts rather than all 50 states. It makes the US results more comparable to the 16 country Eurozone results (16 is closer to 12 than 50). This is one more data point that shows the Eurozone is less of an optimal currency area than the US. Asymmetric shocks (or rather, the asymmetric *effects* of shocks) are bigger for the Eurozone than the US.

[Stephen Gordon]

Actually, another reason why I looked at the Federal Reserve districts was to see if there could be a case that certain regions of the US would be better off if they had a separate currency. I was expecting to see more dispersion, and perhaps an argument for letting the regions such as the FRD of Chicago depreciate against the rest of the country.

[Adam P]

It's an interesting point, but are we thinking of, say, the Chicago FRD having its own currency but remaining in the fiscal union?

[Stephen Gordon]

Yeah, sort of. But it looks as though there'd be little to gain. The fiscal union seems to be enough.

[Stefan Karlsson]

I have pointed out the fallacies of your post here:

http://stefanmikarlsson.blogspot.com/2010/07/canadian-myths-about-spanish-employment.html

[Determinant]

There is an interesting political conclusion here that you can't truly be a stable government (or government arrangement as the EU is) unless you permit fiscal federalism without complaint.

In Canada much as we gripe about poorer areas, we have lots of transfers in place from EI to the Health Transfer to Equalization to make this country work. The same thing happens in the US, the Direct Taxes Clause being a dead letter.

[the_iron_troll]

The more interesting question to me is what the optimal move is now for Europe, given that they have a monetary union but no fiscal union, and (if I understand the situation) little to no chance of getting a fiscal union for decades.

[Luis H Arroyo]

Good question, indeed, iron_troll. This question, I feel has no answer. No optimal answer, in any case, just suboptimal. I think that monetary questions don´t have been very analysed in Europe, they are just a believe, a faith. A german faith, I think, that imply "in the short and long term money has no importance".
Dornbunch (or Modigliani, i don´t know exactly) said: "To get a monetary union with Germany is to get into the bed with a gorilla".