The Pain in Spain

Just back from one of the Costas.

Where in Andalusia alone there are meant to be 1.2m unsold flats, with another 1m+ in construction. That’s a lot of flats. The Coast of Spain is a poster child for excess development. But talking to people, the economic situation and the general level of confidence seems no where near as bad as the UK. So why does Gordon Brown persist in saying the UK is better positioned to handle the economic situation than other countries?

First, I suppose he daren’t admit the truth. Second, and in some ways even more worryingly, he may believe his own hype. But looking at Spain as an example: their banks are not in such a mess because their Central Bank was responsible for stability and imposed sensible balance sheet constraints. Consequently, households are not as indebted (Household debt as % of disposable income:110% vs 174% in the UK). And their Government debt is also less.

As Brown was saying how well the UK is positioned, sterling’s exchange rate against the dollar especially, but also all other major currencies, fell sharply. There is no better indicator of the rest of the world’s view than this.

I overheard someone say yesterday – this all started in the States, why aren’t they doing as badly? This shows the UK Government has done a good job in spinning the line that it’s a global problem. But the exchange rate shows that the UK’s actions over the last few years and very recently have made it worse here:
- Poor structure of banking regulation;
- Excessive debt both household and Government;
- Delayed reaction in terms of cutting interest rates and providing bank liquidity.

You’ve got to be positive; exchange rates are volatile, and there is more than one reason for the dollar’s rise. And a decline in sterling should help the economy, at the cost of more inflation. But Brown’s errors of judgement are slowly being exposed.