Coppola Comment

The ECB has released this letter from its former President, Jean-Claude Trichet, to the Spanish Prime Minister in August 2011. It is excruciating reading. The letter starts with a reminder about the Spanish government's responsibilities: We recall that the Euro area Heads of State or Government summit of 21 July 2011 concluded that " all Euro countries solemnly affirm their inflexible commitment to honour fully their own individual sovereign signature....." Well, ok, this letter is about the threat to the Euro caused by spiking Spanish bond yields and the fear of default and redenomination at that time, so it is probably reasonable of the ECB to ask for assurance that the Spanish government intends to honour its debt obligations. But that's not all: "...and all their commitments to sustainable fiscal conditions and structural reforms." And the letter then goes on to explain in some detail exactly what "structural reforms" the ECB expect...

Lots of people have been celebrating the Spanish recovery. "From boom to bust to export-led recovery", crowed one Twitter commentator. This is the reality: Well, real GDP growth is now positive. I suppose that is a recovery, sort of. Though 0.5% growth is not exactly robust. In the UK we call 0.5% growth "stagnation", not recovery.* But look at this: Note the red at the far right. That is deflation. Consumer prices in Spain are falling by about 0.5%, according to the latest figures. To be sure, this is an annual chart: using annual GDP figures, NGDP is about 1%. I don't call that much of a recovery. And I doubt if the Spanish see it as recovery, either. This is GDP per capita: Yes, the Spanish are worse off now than they were in 2003. Ouch. So if the "recovery" is largely due to falling consumer prices flattering real GDP, what about those exports? Here's the Spanish current account: This looks like something of a success...

Over at Forbes, more on why the ECB won't do QE despite Spanish inflation having turned negative: Spain is in a mess. Over a quarter of its adult workforce is unemployed, and  according to CIB Natixis  it has lost 25% of its production, even more than Greece. Spain’s inflation rate has been falling steadily and has now turned negative: the most recent retail sales figures  show a fall  of 0.2%. Various people  anticipate  ECB easing monetary policy because of the growing threat of deflation in Spain. But this is to misunderstand the role of monetary policy in a currency union. The ECB sets monetary policy for the union as a single unit, not for its individual components. Deflation in Spain is a driver of ECB decisions only to the extent that it depresses Euro zone CPI. And I’m sorry if this sounds brutal, but Spanish unemployment is of no consequence, since the ECB does not have a mandate to target unemployment even at the Euro zone level, let alo...