In the 2000s, both Florida and Spain had large, unsustainable housing bubbles that eventually popped. Since then, however, Florida has largely stabilized. Spain, by contrast, is still reeling from 25 percent unemployment, and its woes are threatening to rip apart the euro. Why the difference?
All told, Florida received at least $31 billion in outright assistance from the rest of the country in those three years. That’s the equivalent of 4 percent of the state’s GDP. And, while Florida’s economy is still struggling, things could be a lot worse. They could be like Spain, which never received this level of aid from the healthier regions of Europe.
Note that large fiscal transfers have been a regular feature of the U.S. monetary union for a long time. In a recent research note, JPMorgan’s Michael Cembalest points to a 1949 economic paper by Penelope Hartley finding that America’s weaker agricultural regions managed to survive the Great Depression with the help of aid from the federal government. These government transfers, Hartley explained, were “unilateral in nature, akin to a capital movement [or] a gift,” and they offset outflows in private capital.
There’s also banking. While it’s tough to compare all the different banking bailouts in the United States and Europe, consider this. Between 2008 and 2012, some 61 banks across Florida went bust, many of them hauled down by bad mortgages. But the Federal Deposit Insurance Corporation (FDIC) stepped in and rescued Florida’s depositors — spending some $10.5 billion to date. Florida didn’t have to salvage its banks all by itself. Spain, meanwhile, is currently trying to scrounge up $11 billion to prop up one of its largest lenders, Bankia. Yet the government is having difficulty raising that kind of cash on its own, leading to bank runs and much panic about whether Spain’s banking system can survive.
When economists talk about the need for a “fiscal union” or a “banking union” in the euro zone, they’re roughly talking about Europe’s wealthier regions providing countries like Spain with some version of the support that the rest of the United States provided to Florida after 2007. Indeed, this is (more or less) what George Soros means when he predicts that Europe will survive thanks to Germany sending “constant transfer payments” to a “permanently depressed” periphery.
Is that realistic? In the past few weeks, European leaders have slowly started to discuss a banking union in more depth. See Wolfgang Munchau’s column for more on that. But an even deeper fiscal union — and the hefty transfers it might entail — still doesn’t get much enthusiasm from countries like Germany. “Aid on that scale is inconceivable in Europe as currently constituted,” says Krugman. “That’s a big problem.”