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Monday, July 05, 2010

"The Eurozone Pain is Mainly in Spain"

Stephen Gordon on the lack of fiscal federalism in the eurozone:

The eurozone pain is mainly in Spain, by Stephen Gordon: 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 45o 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 45o 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.

    Posted by on Monday, July 5, 2010 at 07:12 PM in Economics, Fiscal Policy | Permalink  Comments (28)


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