There is not a day without disturbing news out of Europe. Here is the latest package, starting with a Reuters report from Spain:
Violent protests in Madrid and growing talk of secession in Catalonia are piling pressure on Spanish Prime Minister Mariano Rajoy as he moves closer to asking Europe for rescue money.
Before we move further into the story, let’s just note that the secession talks in Catalonia are real. If Catalonia breaks out of Spain it would bring with it the strongest economic region in the country. The only thing that could stop a secession is that Catalonia would have to apply for EU membership separately, or choose to stay independent from the EU as well. On the other hand, given the trajectory that the entire EU project is on, the Catalonians might actually secession from Spain as well as the EU to be a blessing.
Back to Reuters and the growing social tensions, caused by endless austerity:
With protesters stepping up anti-austerity demonstrations, Rajoy presents painful economic reforms and a tough 2013 budget on Thursday, aiming to persuade euro zone partners and investors that Spain is doing its deficit-cutting homework despite a recession and 25 percent unemployment. Figures released on Tuesday suggested Spain will miss its public deficit target of 6.3 percent of gross domestic product this year, and on Wednesday the central bank said the economy continued to contract sharply in the third quarter.
Countries hit hard by austerity do suffer from weaker GDP numbers. With weaker GDP comes higher unemployment, weaker tax revenues for the welfare state and thus perennial deficits. But as is evident from the Reuters story, these basic macroeconomic facts are as alien to Eurocrats and Spanish politicians as penguins are to Mars. That lack of understanding extends to the devastating consequences of austerity:
By pre-empting reforms demanded by Brussels — such as creating an independent fiscal auditor — Rajoy hopes to sell them to voters as home-grown rather than imposed from outside. Diplomats reported intense last-minute pressure on Madrid on Wednesday from key euro zone policymakers to take tougher measures, notably on freezing pensions. … Spain’s crisis has aggravated tensions between the central government and its self-governing regions. Catalonia needs a 5 billion euros bailout from the central state to meet debt payments this year, but Catalans are convinced they bear an unfairly large share of the country’s tax burden. More than half say they want independence from Spain, the highest level ever. Artur Mas, the conservative president of Catalonia, … [says] Catalonia should … hold a referendum on independence, which the central government says would be unconstitutional. Although an independent Catalonia is a remote possibility, the political instability sends a worrying message to investors.
Spain is ripe for another credit downgrade, which would take it right into junk bond territory. This, together with the mounting political and social instability and an economy on the verge of a free fall, means that Spain now qualifies as Greece 2.
This impression is reinforced by a report from CNBC:
On a recent evening, a hip-looking young woman was sorting through a stack of crates outside a fruit and vegetable store here in the working-class neighborhood of Vallecas as it shut down for the night. At first glance, she looked as if she might be a store employee. But no. The young woman was looking through the day’s trash for her next meal. Already, she had found a dozen aging potatoes she deemed edible and loaded them onto a luggage cart parked nearby. “When you don’t have enough money,” she said, declining to give her name, “this is what there is.” The woman, 33, said that she had once worked at the post office but that her unemployment benefits had run out and she was living now on 400 euros a month, about $520.
This is in the midst of one of Europe’s most generous welfare states. According to Eurostat data, the spending on welfare programs increased in Spain from 19.5 percent of GDP in 2001 to 25 percent in 2009. Of course, welfare programs often replace work-based income, meaning people can live without working. To others, welfare programs supplement a paycheck, allowing them to work less. The net effect is a reduction in labor supply and thereby a reduction in tax revenues.
To which the government responds with austerity. Austerity cuts welfare programs, including unemployment benefits, without relenting on the tax side. The economy remains depressed by government, only at a poorer level.
She was squatting with some friends in a building that still had water and electricity, while collecting “a little of everything” from the garbage after stores closed and the streets were dark and quiet. Such survival tactics are becoming increasingly commonplace here, with an unemployment rate over 50 percent among young people and more and more households having adults without jobs. So pervasive is the problem of scavenging that one Spanish city has resorted to installing locks on supermarket trash bins as a public health precaution. A report this year by a Catholic charity, Caritas, said that it had fed nearly one million hungry Spaniards in 2010, more than twice as many as in 2007. That number rose again in 2011 by 65,000.
The immediate cause of this social and economic disaster is austerity:
As Spain tries desperately to meet its budget targets, it has been forced to embark on the same path as Greece, introducing one austerity measure after another, cutting jobs, salaries, pensions and benefits, even as the economy continues to shrink. Most recently, the government raised the value-added tax three percentage points, to 21 percent, on most goods, and two percentage points on many food items, making life just that much harder for those on the edge.
And it is only going to get worse:
Little relief is in sight as the country’s regional governments, facing their own budget crisis, are chipping away at a range of previously free services, including school lunches for low-income families. For a growing number, the food in garbage bins helps make ends meet. At the huge wholesale fruit and vegetable market on the outskirts of this city recently, workers bustled, loading crates onto trucks. But in virtually every bay, there were men and women furtively collecting items that had rolled into the gutter. “It’s against the dignity of these people to have to look for food in this manner,” said Eduardo Berloso, an official in Girona, the city that padlocked its supermarket trash bins.
This is the face of industrial poverty, a phenomenon that the Greeks are painfully acquainted with. So acquainted are they, in fact, that their country is once again experiencing a political eruption. My Fox New York reports:
Europe’s fragile financial calm was shattered Wednesday as investors worried that violent anti-austerity protests in Greece and Spain’s debt troubles showed that the region still cannot get a grip on its financial crisis and stabilize its common currency, the euro. Police fired tear gas at rioters hurling gasoline bombs and chunks of marble Wednesday during Greece’s largest anti-austerity demonstration in six months — part of a 24-hour general strike that was a test for the nearly four-month old coalition government and the new spending cuts it plans to push through. The brief but intense clashes by a couple of hundred rioters participating in the demonstration of more than 60,000 people came a day after anti-austerity protests rocked the Spanish capital, Madrid. … Wednesday’s strike shut down Greece’s famed Acropolis and halted flights for hours. Ferry services were suspended, schools, shops and gas stations were closed and hospitals functioned on emergency staff. While the demonstration began peacefully, a couple of hundred protesters broke away to smash paving stones and marble facades to use as missiles against riot police, leading to clashes that petered out after about an hour. Eight policemen were injured, including one hit by a gasoline bomb, and 21 people were arrested, police said. At least two demonstrators were also injured. Government spokesman Simos Kedikoglou said the limited violence and what he called a smaller turnout than opposition parties had hoped for showed that “Greek society understands what the government is doing is the only possible solution.”
We have also seen these kinds of protests in Portugal.
So, what is the European political elite going to do about this? Well, not the right thing obviously, which would be to structurally reform away the root cause of the entire crisis – the welfare state. Instead, they are doubling down on austerity and determined to fight to the bitter end to try and force austerity down the throats of their taxpayers. As the British newspaper Independent reports, this arrogant attitude toward the proper role of government is not exclusive to the Eurocrats in Brussels, but includes EU member state leaders as well:
Angela Merkel issued a blunt warning to Germany’s ailing eurozone neighbours yesterday, telling them that pressing ahead with painful reforms and tough budget policies was the only way of resolving Europe’s intractable and deepening economic crisis. The Chancellor made her remarks in a speech to the Federation of German Industries on another day of turmoil in the currency bloc. The Spanish government faced mass anti-austerity protests in Madrid, while Greece was reported to be billions of euro off-track in meeting the terms of its bailout.
If blood letting does not cure the patient, then tap him for another pint or two. Surely that should make him better.
The serious question is of course how long the EU can keep up its ongoing destruction of prosperity in the name of keeping the euro zone together. The immediate outlook is not exactly in their favor:
Meanwhile, the ratings agency Standard and Poor’s once again highlighted the grim state of the EU economy, forecasting that the eurozone would not return to growth until at least 2014. Against such a gloomy backdrop, Ms Merkel insisted: “We need to take a deep breath to overcome this crisis. We must make the efforts that will allow Europe to emerge from the crisis stronger than it went in.”
And the best way to do that, according to her, is to continue to cut government spending, raise taxes, lock the garbage bins to keep people from scavenging for food and send the police after them when they voice their desperation in the streets.
Yep. A perfect plan. What could possibly go wrong here?