German banks were behind Spain’s housing bubble

Finally, they are dismantling the welfare state, reducing social protection, weakening labor unions and collective bargaining agreements, and lowering wages. Their dream has finally come true. They are using Europe to get what they always wanted – all under the excuse that there are no alternatives if we want to be in the euro.

All this is done under the blessing, and under the pressure, of the Eurozone establishment heavily influenced by the German government. Chancellor Merkel has applied these policies, presenting them as exemplary for other peripheral countries referred to as PIGS (Portugal, Ireland Greece and Spain). The German establishment refers to these austerity policies as necessary for a country that has spent more than it could afford. According to this interpretation, the cuts are needed to pay those institutions – including, prominently, the German banks – that have loaned money to Spain, both to Spanish banks and to the state. The “less respectable press” and the more popular ones put it more bluntly: the Spanish workers are too protected and are not productive enough. They have had it too good for too long.

The facts, however, show the falsity of such arguments. When the crisis hit Spain, the state budget was in surplus, the debt was among the lowest in the Eurozone, and the productivity of labour, standardised by sector and by type of labour, was not too different from Germany. The lower productivity (as an average for the whole economy) did not have anything to do with labour productivity, but with the structure of the economy, which had relied on speculative activities managed by banking (with the active involvement of German banks) and real estate. The German banks were behind the Spanish housing bubble. Chancellor Merkel rightly criticised the Spanish activities for allowing the development of such a bubble. But she should have included German banks (and the European Central Bank that made it possible) in that criticism.

* Read more here, LSE’s Europp blog.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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