Money Talk: The Worst is Now Behind Us?

The 18th-century philosopher Leibniz was famed for his optimism, declaring that we live in the “best of all possible worlds”, which is a hard notion to swallow in light of recent events.

Of course, the worst, we are assured, all now lies behind us, whether we are talking about Japan or the Spanish financial crisis, but something somewhere continues to irk me about that statement. Curiously Spain and Japan have many things in common. They both had a substantial housing bubble that subsequently burst, they both have rapidly ageing populations, and they both have governments with a tendency to claim things are getting better when they manifestly aren’t.

Another thing Japan and Spain have in common is their exposure to the impact of Murphy’s law. In both cases, it seems, if something can go wrong, it will. Actually this proclivity is simply a consequence of another common trait: stretching things to their limit. The latest example in the Spanish case emerged last month, following Jean-Claude Trichet’s comments about the European Central Bank’s monetary policy. “The position of the Governing Council is that an increase in interest rates at the next meeting is possible,” he informed astonished journalists.

The problem with this latest initiative is not only that it constitutes something akin to a chronicle of an early death foretold for a highly fragile Spanish economy, where around 90 percent of mortgages are variable rate ones. It also draws attention to an area that it would be much better for the European Central Bank (ECB) not to focus on at right now: the inconvenience of having a single size monetary policy applied to such a diverse group of economies.

Somehow this issue had managed to drop under the radar since the start of the current crisis, but now this inept step from the ECB risks putting the problem back at the heart of the Eurozone debate. Former Irish Premier John Bruton has already openly accused the ECB of having fuelled the Irish housing bubble. Now the ECB risks generating a bout of ire in Spain, with many asking where all this vigilance was when their construction boom was starting.

So returning to my original comparison, in many ways it appears that Japan is blazing a trail that Spain seems destined to follow. Naturally this comparison does not extend to Japan’s recent nuclear problems, although ironically the impact of these might save Spain from the immediate blow of that threatened ECB rate rise.

If you ask the Spanish government, they will tell you “Spain is not another Japan”. Unfortunately this is another good example of something that doesn’t automatically become true simply by being repeated often enough. In order for it to become true, something needs to be done, and we are all still waiting for that ‘something’.