How the ECB Helped Spain “Recover” Faster than Italy from the Crisis

A nation of savers v. a nation of debtors.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In April 2017, the IMF predicted that by the end of the year the Spanish economy would overtake Italy’s in per-capita GDP. It didn’t happen, but Spain does continue to close the gap on Italy.

In 2017, Spain maintained its per-capita GDP at 92% of the EU average while Italy’s slipped another point to 96%. During the darkest depths of the Great Recession, back in 2011 and 2012, Spain’s per capita GDP sank 11 points below that of Italy’s. But now the gap has narrowed to just four points, the smallest since 2007, when, on the back of one of the world’s most mind-watering property bubbles, Spain’s economy very briefly overtook Italy’s.

In recent years, Spain has undertaken painful economic reforms while also benefiting from three tailwinds: the rise of geopolitical risks affecting rival tourist destinations, the ECB’s expansionary monetary policy, and low oil prices. As a result, the economy has grown at a fair clip since late 2013, to the point that it’s often held up as a poster child for Eurozone economic policy, despite 16% unemployment, a surge of low-paid, highly precarious jobs, and a general feeling (in this survey, by 80% of the respondents) that the country still hasn’t emerged from the crisis.

Nevertheless, as Bloomberg trumpeted today, Spain has got its swagger back:

Even the abrupt ouster of Prime Minister Mariano Rajoy this month couldn’t shake investors’ faith that Spain’s recovery is real, whereas Italy’s looks increasingly fragile. Yields on Spanish government bonds are about where they were before parliament voted Rajoy out of office on June 1. The Mediterranean countries’ divergent fortunes are reflected in the spread between their 10-year sovereign debt, which is the widest since 2012.

Italy’s economy is still roughly 10% smaller than it was before the crisis. Rome’s chronic political instability and policy inertia hardly help matters. But there’s also a far less-cited reason why Spain’s economy has fared comparatively better than Italy’s in recent years: the ECB’s extreme brand of monetary repression, which has massively favored Spanish households over their Italian counterparts.

In general terms Italy is a nation of savers while Spain, boasting one of the highest levels of home ownership in Europe, is a nation of debtors. Thanks to the ECB’s low, then zero-interest-rate policy, and eventually negative-interest-rate policy, intended to keep the Euro project and European banks from imploding, savers have had a horrible time over the last ten years. According to the ECB’s own figures, household earnings on interest-bearing assets such as deposits or bonds fell by 3.2 percentage points as a share of disposable income between autumn 2008 and late 2015.

While interest earnings have declined, interest payments have also decreased sharply, falling by around 3 percentage points relative to disposable income during the same period. As the ECB notes, the drop in interest earnings is roughly comparable to the drop in interest payments, meaning that household net interest income in the euro area as a whole has been largely unaffected.

But the reality at the individual level is very different. Millions of households across Europe have lost from lower interest rates while millions of others have gained. According to the ECB, in Germany and France the total drop in interest earnings is similar to the total drop in payments, meaning the effect of lower interest rates on the household sector as a whole has been negligible.

The same cannot be said of Italy, where the drop in household interest earnings is more than twice as large as the drop in household interest payments. This has had a notable negative impact on households’ overall net interest income, which will have also had knock-on effects on consumption and investment levels.

In Spain, by contrast, the drop in interest payments is significantly larger than the fall in interest earnings, with a resulting positive impact on households’ overall net interest income. The larger decline in interest payments in Spain is due to three main reasons:

  • Its high stock of household debt, which, at 123% of gross domestic income, is significantly higher than that of France (82%), Germany (87%) and almost double that of Italy (63%).
  • Interest rates on a large number of mortgages are indexed to money market rates and have thus declined following the ECB’s monetary policies.
  • The preponderance of adjustable rate mortgages, which are far more responsive to changes in monetary policy.

By the same token, when the ECB eventually begins raising interest rates, Spanish households would probably be harder hit than households in Germany, France or Italy. According to Bank of Spain estimates, a 100% basis point increase in short-term interest rates could shave up to 0.6% off an average household’s gross disposable income. For Italian savers, meanwhile, it could mean they might finally begin getting a return on some of their more conservative investments, albeit probably not at their local bank. By Don Quijones.

With impeccable timing, Spain’s three tailwinds are turning all at the same time. Read…  Three External Tailwinds Turn into Headwinds for Spain’s Economy

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  21 comments for “How the ECB Helped Spain “Recover” Faster than Italy from the Crisis

  1. Steve clayton says:

    Hi DQ, really interesting article. On the other foot if it wasn’t for the ECBs support in whatever way there wouldn’t be one Italian bank left afloat.

  2. Don Quijones says:

    Good point, Steve. Of course, the same could be said for quite a few banks in the Eurozone, including Spanish ones, which is why I decided not to mention it. :-]

    • Valuationguy says:


      Is it only me….or does this article pointing out the media is TRUMPETING extremely corrupt) Spain’s gov’t’s ‘business’ reforms leading it to better growth than Italy….seem to be the proverbial “pride before the fall” type of back patting which occurs just before they fly off the cliff……due to civil unrest?

      The last paragraph about Spain’s higher exposure to HIGHER interest debt rates (which is the 100% certain future) is present…but kinda gets swallowed up initial gist of the article which appears to go along with the Bloomberg article’s take.

      Don – What exactly is your take? Do you agree with the Bloomberg article that Italy is in worse shape than Spain because of the current sovereign yields? Or do these yields just reflect the ECB’s (rather than actual market investors) political opinions since it is the primary purchaser of both Italy and Spain’s sovereign bonds?

      It is clear that the EU (and ECB) fully supported the past Rajoy gov’t over the current Italian (and anti-EU) coalition gov’t.

      • Don Quijones says:

        It’s a tough question to answer, Valuationguy, since there are so many variables at play.

        Tbh, I thought the Bloomberg piece was way overly positive. There are lots of reasons to worry about Spain’s economy, including unemployment, household debt, public debt, the widening social security deficit, the potential impact of Brexit on the tourist industry, rising oil prices, the outsize exposure of large Spanish companies and banks to three of the world’s biggest and riskiest emerging markets right now (Mexico, Brazil, Turkey) and, of course, the decidedly messy Catalan conundrum.

        That said, conditions on the ground here in Spain are markedly better than they were in 2012-2013, although much of that improvement was thanks to QE, which appears to be coming to an end.

        One major difference between Spain and Italy right now is how stable they are politically. Italy is being governed by a very uneasy alliance of anti-establishment forces with few, if any, friends in Brussels, while Spain just witnessed one of the smoothest transitions of political power in its history — and one that almost certainly enjoyed Brussels’ full blessing.

        • Cynic says:

          Well, DQ, the new PSOE (‘socialist’) government is – as you clearly appreciate – fully ‘status quo’.

          Leopardi applies as much to Spain as Italy: ‘Everything must change, so that nothing changes.’ :)

      • Cynic says:

        ‘Civil unrest’ is a hobby in Spain: I believe they have more demonstrations and marches than any other European country.

        As the Spanish proverb goes: ‘Lots of noise, but no nuts’…….

        Franco broke the Spanish backbone.

    • Steve clayton says:

      Agreed DQ, an interesting one would be to see how much the Italian Banks are being supported by the ECB through TLTR2 compared to the Spanish Banks. I get the impression substantially more.

  3. Kent says:

    My wife was born in Cuba. Her father came to the US in 1967 to escape Castro. His brother stayed in Cuba. His sister moved to Madrid. My wife then has many cousins in Spain and we travel often to see them. Great people.

    My notes: none of them rent. They all have substantial mortgages. I gather that is a Spanish cultural thing. They all spend like crazy. My assumption is Spain must have a great retirement system and inexpensive healthcare. Because they’re definitely not saving for the future or any emergencies.

    My wife’s cousin Raquel is the wildest. She owns her own little travel agency. She just received about a 180,000 Euro legal settlement and a small inheritance, and invited about 20 people for a cruise from Port Canaveral to the Bahama’s. On her. She drives my father-in-law crazy, who, after leaving Havana with just the shirt on his back, wife and 2 kids, has saved every nickel he’s ever made.

    A tale of two cultures I guess.

    • Cynic says:

      There is a strong element in Spanish culture of keeping up a good front – it is rather Arab.

      A rich man must also be seen to be rich – also, they are, on the whole, rather generous and sociable people.

      This is, perhaps, not so much the case in the Basque country, where my own family would rather, I am sure, die than spend a euro….

      My Catalan cousins, socially distinguished but not very rich, certainly have to spend a lot on entertaining to maintain their social and business position, but do so domestically, saving on restaurant bills, as they enjoy cooking exotic dishes – pretty smart!

  4. peter says:

    Good story Kent but you know what, I’m like the father in law, cautious and try to save, no debt. An my God, life is boring!!! I’d much rather not worry, not care and go on cruises with my friends. At the end of the day we all die and why die with money when you can die in debt and at least look back and say you enjoyed yourself?
    Easy for me to say I guess as I have no kids so no need to save and turn into bank of mum and dad. But I can see the merits of both sides.

  5. Javert Chip says:


    Always like your stuff.

    Interesting to read of circumstances in which Italians appear as the more “responsible” ones.

    • Wolf Richter says:

      I think it’s important to differentiate between the Italian people and Italian politics/institutions. Italians have succeeded despite their politics/institutions.

      • Cynic says:

        Very true, Wolf.

        Italians know their institutions, which is why they put family, and only family, first.

        They even lack the – slightly insane – patriotism of many Spaniards.

  6. Realist says:

    I like to be dealing with Italians especially if you have problems. They have this mentality that everything is fixable one way or the other. That is probably why Italy as a society keeps working despite the chronic mess in Rome.

  7. John Doyle says:

    I’ve been saying that for years. Even when I lived there it was clear the main sufferers of government mismanagement and possible corruption were the Italians themselves.

  8. MC01 says:

    Allow me a quick addendum.

    The reason household debt in Italy is lower than in Spain is for two reasons.
    The first is the South. Due to being economically underdeveloped and because of a deeply ingrained diffidence towards “being in debt with the bank” household debt is much lower than in the North.
    The second is Italy’s fiscal and closely tied labor legislation. To cut a long story short a lot of the debt nominally incurred for “work expenses” are actually “household expenses”. How much? Nobody, not even the government, has a clue. There have been attempts, some of them laudable, to bring this easily abused situation under control but there’s not much political appetite for it.

    A typical example are the middle class real estate speculators which are pretty much the only drivers (together with mall REIT’s and supermarket owners) in a country that, to quote the former Minister of Finance, Pier Carlo Padoan, “is massively oversupplied with empty, half-finished and abandoned houses, condos, apartments, shops, workshops and warehouses”.
    All of Italy’s growth over the past decade came from her real estate sector, a sector where demand is contracting (for no ther reason the country is officially depopulating) but prices remain high. Of course there are firms doing very well, such as Tenova or Ferrero, but they were doing well before and will keep on doing well for a long time.

    Watching real estate speculation in Italy is instantly fascinating, because you immediately understand what it is. The ugly concrete boxes built on (literally) shaky ground peddled as houses, the swarms of shady contractors that appear and disappear according to the flow of money from the banks, the abandoned projects with their rusting equipment and windows left open which somehow remind me of Shelley’s Ozymandias and for all the wrong reasons.

  9. TARMO RAE says:

    the IMF has a terrible track record in their ” predictions “.Why do we still pay ANY attention to them?

  10. roger lagerfeldt says:

    Gold/silver is the only way to save money if you do not want to speculate?? in property,shares,bitcoin,bonds or fiatmoney.

  11. roger lagerfeldt says:

    60 billions euros is pumping into the pigs countries every months since many years back ??ECB will soon be bankrupt when the countries does not pay back,,,then what??

  12. Sneaky Pete says:

    Fwiw, I am Italy. A stupid saver receiving little to no return, and having had to cut back for nearly a decade now while those around me continue to live the high life. I’d also like it to be “my turn.”

  13. raxadian says:

    So in case of a crisis Spain will sink more thn Italy due to having way more debt?

Comments are closed.