Financial resource curse in the Eurozone periphery

Abstract

The housing booms and busts in Ireland and Spain were among the most striking episodes of the Eurozone crisis. While asset price inflation and financialization of housing was gathering pace across the developed world, these two 'most different' cases converged on the same outcome as the most extreme forms of constructionbased bubbles. The key contributions of this paper are threefold. Firstly, we show how cheap credit can be understood as analogous to a natural resource such as oil: resource abundance generates a 'paradox of plenty' whereby an asset becomes a liability. Secondly, we open the black box of political pathways through which this happens, expanding our understanding of how perverse outcomes are produced. Thirdly, we account for why Spain and Ireland were more susceptible to extreme outcomes than other European countries, thereby extending our understanding of asymmetries in the political economy of the Eurozone.

The politics of growth models

“…By contrast, private-sector credit shrank in Germany over the same period. Contrary to a popular argument, which sees foreign banks finance the Spanish demand boom by intermediating foreign savings through capital outflows (for example, Quaglia and Royo 2015;Dellepiane-Avellaneda et al 2021), the bulk of credit was created by domestic banks. While the stock of foreign loans peaked at 53 percent of GDP in 2007, the stock of domestic banks' loans was almost three times larger.…”

“…This type of intertwining of local politics, housing development, and regional banks was as much a characteristic of PP-run localities in Murcia and Valencia as of socialist-run Andalusia or autonomist Catalunia (López and Rodríguez 2011). Furthermore, the PP strengthened housing demand by deregulating the mortgage market, which led to the emergence of the second-largest securitization market in Europe after the UK (Dellepiane-Avellaneda et al 2021). Confirming party convergence on key policies for the growth model, when the PP lost the elections in 2004, the PSOE made no attempt to reverse the decisions of its predecessors, letting the housing bubble balloon until 2007.…”