Money Is Vanishing From Southern Europe

Moneybox
A blog about business and economics.
May 25 2012 10:48 AM

Money Is Vanishing From Southern Europe

When you read about how there's "a crisis" in Europe and also that the recession is worsening it's worth stopping for a moment to check on the mechanics. After all, say what you will about Spanish labor market regulation or Italian competition policy, but they're not worse than they were nine months ago. So why are their economies shrinking?

Fiscal policy is part of the story, but a growing part of the story is that companies no longer trust that euros kept in southern european bank accounts are safe so the medium of exchange is vanishing from troubled countries:

Several multinational corporations have already taken the same view. Vodafone, the mobile phone operator, and GlaxoSmithKline, the pharmaceuticals firm, say they are “sweeping” money out of Greece and into British banks each evening. This applies not just to Greece but to most other euro nations, although Glaxo says it still keeps money in Germany.
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Something to note is that this is exactly what one of the downsides of leaving the euro would be. If Spain reintroduced the peseta, foreign firms would still sell some stuff to Spanish customers. But they probably wouldn't want to leave many of their profits laying around peseta-denominated in Spanish banks, available as funds for lending to the Spanish domestic economy. Spain would end up capital-constrained and need to spend a lot of time worrying about its foreign exchange holdings. This is a real downside and not just something to gloss over. But the rub is that if you're going to suffer massive capital flight anyway, then the case for ditching the euro gets that much stronger.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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