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Milken Institute | Newsroom | Currency of Ideas - A smart card that could kickstart Spain’s stalled economy Currency of Ideas: A smart card that could kickstart Spain’s stalled economy
June 15, 2012 at 09:46 AM
A smart card that could kickstart Spain’s stalled economy
  Capital Markets Europe Finance Financial Innovations Public Policy Regional Economics
  Posted by
Joel Kurtzman
Joel Kurtzman
The European Union’s weekend decision to lend Spain 100 billion euros will go a long way to saving its banks, but it’s not enough to save its economy or increase employment. To bring down Spain’s 24 percent overall unemployment rate, and its 50 percent youth unemployment rate, Madrid must accelerate economic growth, from 0.8 percent last year, and negative this year, to the strongly positive rates not seen since the introduction of the euro. To do that, Spanish products, services, and real estate must become cheaper.

Prices are the surest way to create economic change, yet the traditional means for a country to kick-start economic growth – devaluation of its currency – is not an option. Since Spain is part of the 18 member Eurozone, neither legal provisions, nor economic mechanisms, exists for one member to bring down the value of the euros it uses at home. Each of the Eurozone countries is in the same boat -- a boat made in Germany.

The euro’s value is calibrated to the Eurozone’s strongest economy, Germany, much more than to its weaker economies, like Spain. The reason why that’s the case is simple. The German economy makes up a third of the Eurozone’s GDP, and dominates intra-European trade as well as trade with the rest of the world. Germany is the euro’s most market-facing country. As a result, the euro’s value is more about Germany, less about Spain.

But that’s not all. If the value of the euro fell sharply, it would make all European goods cheaper. That too is more likely to affect Germany than Spain, since German goods represent a bigger share of Europe’s experts and are more in demand. Cut-rate automobiles from Mercedes Benz and BMW are likely to outsell those from Spain’s SEAT cars, because SEAT is less of an international brand. Selling too many cars could be inflationary for Germany, while providing only small-scale benefits for Spain. As a result, Germany is cautious about letting the euro become too cheap.

There’s an even bigger obstacle to making Spanish goods more competitive. Half of Spain’s trade is with other Eurozone countries. The problem with that is that if the value of the euro were to fall, it wouldn’t make Spanish goods more attractive to its largest trading partners, since they too use the euro. And yet, Spain needs to sell more Spanish goods and more vacation and retirement homes to its European partners to turn around its economy.

We need to think more creatively about the problem.

Here’s one idea. Suppose the Spanish government were to sell coupons priced in euros to persons or companies that are not Spanish. These coupons (they could be in the form of smart cards, smartphone apps or online apps) could be sold at a discount to face value of, say, 20 percent. Suppose, further, these discount coupons had a one year expiration date, at which time the discount disappeared.

If Spain did this, Europeans who were considering the purchase of a Spanish retirement apartment, or going on a Mediterranean vacation, would have an incentive to make their purchases quickly. Companies in Europe wanting to import Spanish pharmaceuticals, wind turbines, auto parts, wine, and foodstuffs, would also have an incentive not to dawdle. Sales of cheap Spanish goods and services would most likely to soar, helping revive Spanish growth and job creation.

The price for issuing these coupons would fall upon the Spanish government. But compared to many countries, the Spanish government does not have a big debt load. The IMF estimates the Japanese government has borrowed 229 percent of its GDP, the U.S. 107 percent of its, and Germany 82 percent; Spain only owes 68 percent of its GDP. That means it still has a lot of borrowing capacity left. A 20 percent increase in Spanish exports, to about 255 billion euros, would only cost the government 8 billion euros, if each coupon represented a 20 percent purchasing discount. That cost would be partially offset by increased taxes from sales revenues, but even if none of it were offset, it would only add about 10 percentage points to Spain’s debt. Spain would still be well below German and U.S. levels, and slightly below the debt of Britain and France.

Europe’s loan to Spain may have helped Madrid fix its bank-debt problem. But the only way to fix Spain’s employment problem is to make the economy grow by making Spanish goods, services and real estate cheaper. When looking at these issues, economists and policy makers must do what they so rarely enjoy doing – thinking creatively.

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