Wheels within wheels within wheels: the importance of capital inflows in the origin of the Spanish financial crisis

Abstract

With the creation of the Euro, the Spanish economy established an exchange rate regime similar to that adopted by many emerging economies during the 1990s. At the same time, the Eurozone as a whole adopted a currency system with features similar to the U.S. currency regime. In emerging economies, as in the U.S. economy, the adoption of these models was accompanied by strong growth in capital inflows, as well as severe financial (mostly banking) and/or macroeconomic (mostly trade) imbalances. Several authors have linked capital inflows with imbalances as cause and effect. This work uses some of those arguments, along with statistical data on the characteristics and evolution of capital inflows registered by the Spanish economy, and by the Eurozone as a whole, in order to propose a causal link between post-Euro exchange rate regimes adopted in Spain, capital inflows, and the imbalances that preceded the financial crisis of 2008.

UNPACKING CAPITAL SWITCHING: Value, Rentierism and Displacement in Absolute and Relative Forms of Switching

“…The solution to this quasi‐default on mortgage and interest payments envisaged by the EU and the German and Spanish authorities consisted in the Spanish government and the EU providing Spanish banks with the necessary liquidity means to pay off their debts (Dullien and Guérot, 2012; Quaglia and Royo, 2015; Fernández and García, 2018). International and particularly German actors largely avoided the devaluation of their capital that was trapped in Spanish real estate, as their debts were repaid.…”

The Contradictory Evolution of “Mediterranean” Neoliberalism in Spain, 1995–2008

“…Spain’s productive underdevelopment relative to the European core in conjunction with European Monetary Union membership constituted another core contradiction the Spanish SSA had to deal with, as current account deficits, driven to a great extent by the strength of internal demand throughout the whole decade, found their mirror-like image in Germany’s increasing current account surpluses, an explosive dynamic that has been starkly accentuated since 2001. However, despite this having reinforced the internal evolution of a distorted capitalist accumulation process, whose deleterious effects were to be openly manifested after the onset of the Great Recession, the incoming funds, which served to cover for increasing trade deficits, were ultimately functional to ongoing socioeconomic reproduction, as they played a crucial role in feeding a massive housing bubble well beyond existing financial resources within the Spanish territory (Fernández and García 2018). The explosive evolution of housing prices represented the ultimate anchoring point of the whole institutional assemblage, and crucially underlies the upward trend followed by both private consumption and investment in the years here under consideration.…”

“…Second, the euro has played a crucial role, as it helped attract a growing pool of external liquidity, from transnational corporations’ profits (Aalbers 2017), to European core countries’ current account surpluses (Fernández and García 2018), which found in the Spanish housing market an appropriate outlet for their desired investment opportunities. While previous asset bubbles had always ended when the scarcity of national financial resources caused a sudden hike in interest rates, thus preventing further rounds of investment, the adoption of the euro ensured that available resources were no longer restricted to those belonging to the national territory (Naredo 1996, 2009).…”

Twenty Years of the German Euro are More than Enough

“…Spain's net international investment position deteriorates accordingly. Actually, gross external debts rise by even more since Spain's banks, too, are busy undertaking international adventures (see Febrero and Bermejo [2013];Febrero, Uxó, and Bermejo [2016]; Veld [2014]; Fernández and Garia [2018]).…”