As the World Turns…Why the Global Economy is More Like a Soap Opera Every Day

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Over the course of the next few months, we will be fortunate enough to have Tara Powers blog for us while living in Spain. We are hoping that she can give us a different perspective on not only what is happening here in the United States, but impart some knowledge on what is happening globally...

- John Paul Murphy

As the World Turns…Why the Global Economy is More Like a Soap Opera Every Day

If watching the 11:00 news wasn’t always an uplifting pastime in the U.S., doubtless it’s even more enjoyable now that we get to hear about how our country’s economy is crashing and burning every night as well. Maybe you’d think that being across the pond, nightly news would be a bit lighter — scenes from Oktoberfest, or at the very least the latest update on David Beckham.

Except, guess what? The proverbial housing bubble burst is here as well, has led to a strikingly similar, just less publicized, crisis of financial affairs.

So, what happened? At least in Spain — the country that I’m calling home — the sequence of events was entwined with those in the States. Going back to the introduction of the Euro in 2000, historically low interest rates gave rise to a booming real estate market. This boom was characterized by an explosion of construction and an unusually high demand for this excess of homes, many of which were financed with low-interest mortgages that allowed as much as 40 years for repayment. Spanish banks turned to international markets to finance their increasing demand, so much so that 25 percent of the Spanish real estate market was being financed by money coming from outside the country.

When the subprime mortgage crisis hit North America in August of 2007, confidence in the European real estate market plummeted as well. The Spanish markets had to rely on Central Bank of Europe to keep their finances from collapsing as debts grew. Banks stopped lending for mortgages and construction, paralyzing real estate growth, sales, and demand.

As of October 6, 2008 15 percent of the 25 million homes in Spain are vacant. The construction sector has lost over 22,000 workers since the start of 2008, and agriculture nearly 10,000. Small business owners are giving up their businesses at a staggering rate — almost 300 each day since May 2008, according to the National Federation of Autonomous Workers.

Germany, Sweden, Austria, Denmark, and Ireland made moves in recent weeks to cover 100 percent of their investors, although the rest of Europe is seeking a more coordinated plan. A major summit of 20 countries was held on October 11 to formulate such a plan, and the following days saw countries pledge a combined 2.2 trillion Euros in their own forms of the U.S. bail-out plan. Britain alone pledged 37 billion pounds in new capital to its three largest banks, as well as 400 billion pounds in bail-out funding.

The 27 countries of the EU are currently involved in a European Council in Brussels to create a more detailed common plan. In addition to these efforts, the president of the EU plans to call another summit next month in order to reform the world financial order put in place at the Bretton Woods conference in 1944, possibly including a revision of the way markets, banks, mortgage firms, hedge funds and private equity are supervised as well as higher guarantees for bank deposits.

So the moral of the story is, things are about as precarious over here as they are in the good ol’ U.S. of A. While the U.S/Euro exchange rate may still make buying any souvenirs for myself a bit of a pain, the economy here is just as tenuous. And just like in the States, it seems that only time will tell what’s in store for the global state of affairs.

Until next time…adios!

Image Credit: Michael Himbeault on Flickr.com