Secondly, if it is demographics, why did housing bubbles happen in demographically diverse places and not start in demographically similar places?

“Didn’t you write a year ago that Spain should devalue but for obvious reasons cannot?”

Uffff! One year ago, five years ago, whatever. I have been constantly arguing that the single interest rate monetary policy (rather than the availability of cheap immigrants) would lead to the mess we have now. The only real answer for Spain if the Euro continues at its current relatively high levels (which is not by any means guaranteed, it depends) is long term wage and price deflation (unfortunately) so that they can restore the competitivity in the export sector (since exports is about the only part of the Spanish economy left which could seriously grow) lost in years of above average inflation (fuelled by the monetary policy from the ECB which was inappropriate to the Spanish case, although appropriate to the German one).

But isn’t this post supposed to be abot the developing financial and economic crisis in Eastern Europe. I’ve also been writing about and predicting this on this blog for the last couple of years. Its the demography, stupid!

(sorry Oliver, no offence meant to you, just paraphrasing Bill Clinton).

Well, put like that, my opinion is no. It was an indifferent element. If that “cheap” labour had been put to work in say factories, to manufacture for exports, then the problem wouldn’t have been so bad. And indeed this would be one of the ways forward even now for Spain.

The trouble is that the labour isn’t that cheap, and for example the 1,600 workers just laid off at the Nissan factory here in Barcelona are being offered work in the new Renault-Nissan fatory being built in Tangiers (Morocco).

“I do realise that this is a sensitive question, by the way, but I think it should be looked at.”

It’s not so much a sensitive question Oliver as a complex one. We need to get back to why it was so much more attractive to borrow the money to build houses than it was to borrow it to build factories. The labour is a neutral element here.

I do realise that this is a sensitive question, by the way, but I think it should be looked at.

“This leads me to a question. Didn’t availability of cheap labor through immigration make the housing bubble in Spain worse?”

Look, this is quite a complicated situation, but you need to think about which way the arrows of causality point? It is quite true that the construction booms in Ireland, Spain and Greece were sustained by the arrival of large numbers of migrants workers in the way that they were not in Latvia, Estonia, Bulgaria and Romania (since in the latter countries the workers left to find employment in the former). For this reason the Eastern European booms have been much more dramatic and short lived, as the shortage of workers sent wages and costs through the roof, and the resulting inflation brought the whole pack of cards tumbling down.

But what made the boom possible in the first place was the cheap funding on offer via the eurosystem and EU and ECB guarantees. It was this that made the whole massive folly possible in both cases, and it was the availability of funds that sucked in the workers, and not the immigration which attracted the funds.

Of course, applying your logic, you could say that the German banks are having such a hard time with the US sub-prime and Irish (Delfa for Hypo) write downs simply becuase the lack of young immigrants meant there was no housing boom due to weak demand for housing. But I’m not sure it works satisfactorily in either case. As Brad Setser says, it is probably better to “follow the money”.

Eastern Europe is a current account deficit region that deindustrialised in the 90s; all the others are substantial surplusers that industrialised in the 90s and are members in good standing of ODIC.