Here’s a wee corrective to news about Spain’s soaring bond yields of over 7 percent today. By historical standards, that’s not that high an interest rate for Spain. Indeed, Spain seems to have regularly paid higher rates than this in the late-19th century.
That’s not to say Spain isn’t in dire trouble. On the contrary, Spain is totally screwed. But the issue isn’t so much about those interest rates as such. Part of the problem is that outside Spain and Italy, everyone else’s borrowing costs are tumbling, and you don’t want to be the outlier. The larger issue is just that Spain’s growth outlook is so bleak. And that’s actually a shocking thing for a country with a 24 percent unemployment rate. For the Canadian economy to grow faster at this point, it needs to invent some new stuff; import some technology that’s not currently in use in Canada for some reason; identify and restructure some long-entrenched, inefficient part of the Canadian economy; or some other big, difficult thing. Spain, by contrast, has lots of able-bodied workers—24 percent of the labor force!—not working at all. That’s the lowest of all low-hanging fruit. But under its current set of institutional arrangements, Spain has no fiscal policy or monetary policy tools it can use to pick that fruit. And it’s the very slow underlying growth rate that makes 7 percent interest rates impossible to live with.