Club Med and the Sun Belt
Could the implosion of the Sun Belt give valuable information how to adress the Club Med economic mess? Some interesting observations and comparisons via Voxeu.
The experiences of a few US states in weathering the ongoing economic turmoil could provide some insight into the Eurozone’s struggles. In particular, Florida, Arizona, and Nevada along the US Sun Belt saw a big housing bubble and subsequent bust, much like Greece, Ireland, and Spain along Europe’s periphery, a group we call ‘Club Med’. Both groups, each part of a monetary union, continue to suffer severely from the after effects of the crisis, but the Sun Belt states have recovered earlier and have not faced the trauma of a sovereign debt crisis. Some initial comparisons can be made about the experience of the two groups that could ultimately help shape the Eurozone’s long-term adjustments.
A possible reason for the quicker recovery of Florida, Arizona, and Nevada is the rapid adjustment of those states’ housing prices compared to Greece, Ireland, and Spain (see Chart 2 for a case in point). Declining housing prices can be expected to accelerate the recovery (or at least the stabilisation) of construction activity and force loss recognition and more rapid restructuring of bank balance sheets.
The pre-crisis increase in home prices was broadly comparable in the Sun Belt and Club Med. Between 2000 and 2006, home prices more than doubled in the Sun Belt (120% in Florida, 106% in Arizona, and 108% in Nevada) while they increased by 76% in Greece, 86% in Ireland, and 121% in Spain.
However, the downward adjustment in prices after the crisis was much faster in the Sun Belt. Between 2007 and 2011, housing prices fell by 43% in Florida and Arizona, and 53.5% in Nevada. In contrast, home prices in Greece, Ireland, and Spain fell by 12%, 33%, and 15% over the same period.1 Concern that banks in Club Med carried large, unrecognised real estate losses deterred lending to them, accentuating the credit crunch.2
Full article here.