Pyramid investment schemes often blossom in the dog days of an unsustainable boom. Is what appears to be a stamp fraud in Spain a sign of an economy teetering on the brink?
If so, it joins more conventional reasons for concern. The European Central Bank recently predicted that Spain’s current account deficit would hit 9 per cent of gross domestic product by 2007, the worst in the eurozone. Unlike Iceland, Spain cannot devalue its currency to correct rising external imbalances. Years of negative real interest rates have fuelled booms in both investment and housing. As Spanish companies have run out of opportunities at home, they have increasingly turned their eyes overseas – witness the acquisitive forays into the UK by companies such as Santander and Ferrovial. Meanwhile, household debt has risen to 110 per cent of disposable income.
Correcting this situation will be challenging. Leaving the euro is both unpalatable and seems inconceivable. Other mechanisms, though, are difficult to find. If wage growth were to moderate, either consumption would slow, or inflation would decline. However, a third of Spanish wage agreements contain post-facto indexation clauses, which are likely to continue to fuel inflation rather than help contain it. Spain’s slow but sure loss of competitiveness, via high wages and low productivity, is likely to exacerbate the deficit as export growth declines. The government lacks obvious tools to raise domestic savings or inward investment.
Spanish bulls argue that the economy has enough resilience to sustain external imbalances at this level. That may be true in the short term, but cannot disguise the policy dilemma that the government must confront. In the absence of this, an eventual exit from the euro begins to look less inconceivable.