The Pain in Spain

After the leaders of global finance just spent six months dealing with the Greek leak in the dikes safeguarding the Euro, it now appears that Spain is leaking as well.   The newly announced Spanish budget shows higher than expected deficits, and the spread between Spanish government bonds and German bonds has started to increase again.

The world economy has been kept afloat, despite the need for deleveraging, by huge infusions of cash from the ECB and the Fed, and huge infrastructure investments and loans by the Chinese.  What remains to be seen is what is the right analogy for their impact on the world economy.  Were they like huge infusions of antibiotics to an infected wound, so that once the immediate threat is gone the body starts to heal itself?  Or were they like huge pumps of hot air into a leaky hot-air baloon, so that the baloon rises only as long as the hot air keeps getting pumped in, but starts to sink shortly after the pumping stops?

There have been promising signs of late — increased US car sales and manufacturing activity, good manufacturing activity in China — but also worrisome ones, especially with regard to recession in Europe.  The next six months should tell the story of whether the world economy can continue to move forward and pick up steam on its own, or whether it was artificially and temporarily pumped up by huge administrations of cash and credit that cannot be sustained.

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About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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