Tagged: SPAIN

Spain: A Macroeconomic Assessment

We keep hearing from the soothsayers who suggest Europe is in the recovery phase of a protracted recession. The latest to join the chorus is the British newspaper The Guardian:

Spain’s economic recovery was underlined as its manufacturing sector recorded its greatest activity in seven years, but the financial crisis has left its mark with separate figures showing a sharp rise in people leaving the country. A snapshot of the state of Spanish factories combining output, orders and employment showed activity rose to a seven-year high in June. The Markit PMI increased to 54.6 from 52.9 in July – with a reading above 50 indicating expansion. That puts growth in Spain’s manufacturing sector ahead of Germany, France and Italy and is further evidence that its economy is outperforming the eurozone as whole.

To begin with, it is not very hard to outperform the euro zone, where GDP growth is as close to zero as anything can be. Private consumption is exceptionally weak, and even the OECD has been forced to downgrade its previously optimistic growth forecast for the EU.

But more importantly, a rise in an index is not a rise in actual economic activity. For that to happen, there must be a change for the better in national accounts data. More on that in a moment – first we return to the Guardian story:

The struggling Spanish car industry in particular is showing signs of recovery thanks in part to a government incentive scheme, now in its sixth year, for people to upgrade their vehicles. Christian Schulz, senior economist at Berenberg bank, said Spain was benefiting from the reforms that it put in place in response to the financial crisis. “If we add similarly impressive readings for the Spanish services sector, we can safely conclude that Spain is reaping the rewards of its tough labour market reforms of 2012 and is becoming a mainstay of eurozone growth,” he said.

The program referred to is one where government offers 1,000 euros toward the down payment on a new car that costs no more than 25,000 euros, provided the buyer trades in a 7-10-year-old, less fuel efficient car. According to at least one report this has contributed to the sales of 300,000 cars in Spain in the last couple of years.

There are a couple of problems with programs like these. First of all, they create a sense of entitlement among consumers, who learn to expect their government to chip in. Today it is toward cars, tomorrow – who knows? Homes? Furniture? Haircuts?

Secondly, it skews the car market. People buy smaller cars than they otherwise would, sending signals of demand to car manufacturers that are not based on free-market conditions but government subsidies. When those subsidies end because they are too costly for government, manufacturers will be left there with production capacity designed not based on the free market, but on defaulted government promises.

Third, the rebate increases the purchasing power of consumers who would otherwise not be able to afford a car. As a direct result, consumers can get approved for car loans with weaker ability to repay them than if there had been no tax-paid incentives program. What happens when those consumers default on their loans?

It remains to be seen how important this program is for the weak but nevertheless increase in private consumption that we can see in Spain’s GDP numbers.


Adjusted for inflation, Spanish private consumption fell for 13 quarters in a row, from third quarter 2010 to third quarter 2013. In the fourth quarter of last year and the first this year, households increased their spending by, respectively, one and two percent.

Does this signal a recovery? It is too early to tell, especially since there was a similar spike in early 2010. But it is entirely likely that the car-buyer incentives program has artificially boosted the shift in consumer spending from decline to increase. This means that the reversal from worse to better – at least in consumer spending – is the result of government spending. Since Spanish government finances are in bad shape due to the economic depression, this only means that the macroeconomic problems that the Spanish government is trying to solve are just being shuffled around.

There is more evidence of this. In the figure above, the strongest growth is not in private consumption but in exports. In the past 17 quarters, since the beginning of 2010, Spanish gross exports have increased by an annual rate of 6.7 percent on average. By contrast, private consumption contracted by an annual average of 1.3 percent over the same period. This marks a shift in importance for GDP, with private consumption slightly declining as growth driver, and exports rising in its place.

Arithmetically, this makes a lot of sense. A variable that constitutes a small share of GDP grows rapidly for a long period of time. At some point it ceases to be a small variable and instead becomes important for GDP. When it does, its effect on GDP increases, accelerating GDP growth while exports still grow at the same pace as before.

However, this is a problem from a macroeconomic viewpoint. The Spaniards are not getting wealthier from the exports boom. Private consumption is not moving anywhere, and when it seems to be increasing it is ostensibly because of a government subsidy in one particular area. (There is also a home buyer’s program, but let’s not even get into that today…)

But it is not just private consumption that shows that there is no real domestic recovery in Spain:


While, as the green line shows, the exports share of GDP has been growing steadily during the Great Recession, the orange line shows that business investments have been on a steady decline (again as share of GDP). And this decline is all the more dramatic: Spanish businesses have decreased their investments, in fixed prices, for five straight years now.

Yes – five straight years. Since the first quarter of 2009 there is not a single quarter with growth in business investments. Measured in fixed prices, the amount that Spanish businesses spent on investments in the first quarter of 2014 was only two thirds of what they spent in the first quarter of 2009. This has happened while, again, exports have been growing solidly.

So long as businesses do not reverse the downward trend in investments on a sustained basis, there can be no recovery in the Spanish economy. Growing exports will not generate a recovery, especially not when the growth is concentrated to manufacturing. Modern manufacturers in Europe often import parts and assemble them on European soil. This means that growing exports are followed by growing imports of manufacturing inputs – in essence a passing-through of products that does not have any positive repercussions for the rest of the economy.

In January I explained that Germany has precisely this problem. If the exports were a sign of recovery in other EU countries, there would be hope for a recovery across Europe. But that is not the case: everywhere you look in Europe, private consumption and other domestic-spending variables are growing very reluctantly, if at all. The exports that the Euroepans are so happy about are, in other words, bound for other continents, without having any real positive effect on the European economy itself.

Europe will not return to growth, prosperity and full employment until its political leadership realizes what the problem is: the big, burdensome welfare state and its high taxes and anti-productive set of incentives that steer people away from self sufficiency and straight into life long career of sloth, indolence and government dependency.

EU Economy Going Nowhere

There is no better macroeconomic “health indicator” for an economy than private consumption. Not only is it the largest part of GDP, but private consumption also reflects well the overall sentiment of households. Since households are important spenders, taxpayers and workers all baked into one type of economic unit, the growth rate of private consumption is the best quick-check “wellness test” of an economy. (A more detailed understanding of the shape of an economy obviously requires a more detailed macroeconomic and microeconomic analysis.)

Since I have recently reported on how the European economic recovery has not materialized, I figured it would only be fair to perform a quick-check macroeconomic “wellness test”. Alas, I pulled private consumption data from Eurostat, and I made sure to get inflation-adjusted figures based on a price that is relatively distant in time. (If the index year is close in time there can be growth distortions based on the mere proximity to “year zero”.) I also selected quarterly data, which is not commonly used for this purpose. My motivation, though, is that if the quarterly data is not seasonally adjusted it allows for a more frequent communication of household sentiments.

You would expect this type of data to be available from every EU member state for every quarter you might want it. I often encounter that attitude from consumers of public policy research: somehow they assume that every piece of statistical information anyone could ever want is readily available within two clicks into the internet. That is not the case, though, and the reason is simple. Quality statistical material requires careful data collection, according to detailed and very rigid collection methods; it requires methodologically rigorous processing according to standards defined not just for this piece of information, but for every comparable piece of information in the world.

There are other methodological restrictions on statistical information that contribute to the production cost. We should actually take this as a sign of quality for the data we have access to; I always get suspicious when scholars claim to have produced large sets of quantitative information in short periods of time – it often leads to bombastic conclusions that later prove to be little more than a house of cards built on clay feet.

Anyway. Back to the European economy. For reasons of high quality standards and therefore reasonably high production costs for national accounts data, not every EU member state reports the kind of consumption data analyzed here. Figure 1 below reports real private consumption growth in 24 EU member states from 2002 through 2013:

Figure 1

C pr EU 24

The growth rates, again, are inflation-adjusted rates per quarter, over the same quarter the year before. This means that the blue line reports a rolling annual growth rate, updated quarterly. As such it helps us pinpoint business cycle swings with good accuracy. The  most obvious example is that private consumption nosedives in the second quarter of 2008: after having averaged an acceptable two percent per year from 2003 through 2007, private consumption literally came to a standstill over the next five years. From 2008 through 2012 the average growth rate was zero percent.

The difference may not seem like much, but for two reasons it would be wrong to draw that conclusion. First, a one-percent reduction in private consumption equals a decline in spending worth a bit over two million jobs in the EU-28 economy. This does not mean that two million Europeans automatically lose their jobs if households cut spending by one percent – the economy is more dynamic than that. But it does mean that if private businesses lose sales over a sustained period of time they cannot afford to keep all of their employees. At the macroeconomic level this eventually translates into, roughly, two million jobs per one percent private consumption (measured in current prices).

In other words, even seemingly small fluctuations in household spending can have major effects on the economy.

Secondly, sluggish private consumption means that the economy is not evolving. If the growth rate falls below two percent, then at least in theory consumers are no longer improving their standard of living. I explain in detail how this works in my book Industrial Poverty (out August 28); a very brief explanation is that it takes a certain level of sustained spending to maintain one’s standard of living. As products get better and other factors affect the quality of our consumption, we have to grow our outlays by a certain minimum rate just to make sure we keep our standard of living intact.

For the first half of the 12 years reported in Figure 1, households in the 24 selected EU member states managed to maintain their standard of living; on the other hand, for the second half of the period they did not maintain that standard. With an average growth rate of zero (adjusted for inflation) the theoretical loss of standard of living was two percent per year.

In addition to creating unemployment, this protracted sluggishness in household spending is a long-term prosperity downgrade for Europe’s consumers. What is even worse is that there are still no signs of a return to higher growth rates. While 2013 saw an average .8 percent growth in the EU-24 we discuss here, that came on the heels of ytwo years of negative growth (-0.6 percent). There was a similar, and bigger, uptick in 2010 (1.5 percent) that proved to be an anomaly compared to the two years before and after.

Furthermore, data for the first quarter of 2014, which is available for 20 of the 24 EU member states, shows a rise in inflation-adjusted private consumption in three countries only. While it is good to see a rise in Greece and Spain, which have been the hardest hit by the crisis (Austria is the third) this is far too isolated and far too small to be the turnaround many economists have hoped for.

More importantly, this is where the use of quarterly data can spook the careless observer. Spanish private consumption, which is up by 3.1 percent in the first quarter of this year, has a pattern of growing every other quarter. Since it was down 1.3 percent in the last quarter of 2013, this only means that the economy is on track with its historic path (which, sadly, means zero growth over the 16 quarters in 2010-2013). The rise in Greek private spending is part of a similar pattern, coming on the heels of a 2010-2013 average of -1.1 percent.

Bottom line, then, is that European households are unwilling or, more likely, unable to unleash that spending spree the European economy needs so badly. This should not surprise any regular reader of this blog, but it will in all likelihood be a surprise to those who live in the illusion that big government and the welfare state are the blessings that prosperity is built from.

Europe in Permanent Stagnation

I have explained on numerous occasions that the European economy is not at all in recovery mode. Jobless numbers are frighteningly bad, the long-term trend is still pessimistic, GDP growth is so slow that there is a credible deflation threat hanging over Europe, the OECD recently wrote down its growth forecast for the global economy, including the EU. All in all, Europe is a slow-motion economic disaster.

Now British newspaper The Guardian reports of yet another dark cloud over the European economy:

The eurozone’s fragile economic recovery suffered a setback in the first quarter after slower-than-expected growth. The combined currency bloc scraped together growth of 0.2% between January and March, in line with growth in the previous quarter but disappointing expectations of 0.4% growth.

This amounts to 0.8 percent for the entire year, which is deeply insufficient to turn around the European economy. The best you can say about this growth figure it is yet another indicator that my forecast of Europe being stuck in long-term stagnation is correct. This long-term stagnation is not a recession – it is a new era for the European economy.

There was a huge divergence in fortunes, with Germany growing at the fastest rate of all 18 countries, with gross domestic product increasing by 0.8%. It followed 0.4% growth in Europe’s largest economy in the previous quarter. The pace of recovery also accelerated in Spain, with growth of 0.4% outpacing a 0.2% increase in GDP in the previous three months.

I have explained before that the German economy is growing because of its strong exports. The gains from the exports industry do not spread to the rest of the economy, as is evident from paltry domestic spending figures for the German economy. The same is, in all likelihood, true for the Spanish economy, whose national accounts I will take a look at as soon as time permits.

When exports drive a country’s GDP growth, the country is not in a sustained recovery. The only way a sustained recovery can happen is if private consumption and corporate investments increase together. That is not yet happening in Germany, and it is certainly not happening in Spain.

At the bottom of the pile was the Netherlands, which suffered a shock 1.4% contraction in GDP, reversing 1% growth in the previous quarter. Portugal’s economy shrank by 0.7%, following growth of 0.5% in the final three months of last year. The French and Italian economies were also dealt a blow, with zero growth in France and a 0.1% contraction in Italy in the first quarter. It followed 0.2% growth and 0.1% growth in the fourth quarter of 2013.

Stagnation, for short. And the only remedy that Europe’s political leaders seem to be able to think of is to print even more money, to saturate the economy with liquidity and to thus depreciate the euro vs. other major currencies. But with the Federal Reserve continuing its Quantitative Easing policy and the Chinese facing major problems in their financial sector it is entirely possible that the attempts at eroding the value of the euro will be neutralized by similar attempts from two of the world’s other major central banks. That in turn will put a damper on exports and rob the Europeans of even the illusion that their GDP will at some point start growing again.

At the end of the day, the fact that this negative news disappoints so many people in Europe is yet another indicator that my new book, Industrial Poverty, out in late August, is badly needed.

Europe’s Unemployment Frustration

Never bark at the Big Dog. The Big Dog is always right.

As expected, the harsh reality of the European economy is beginning to sink in with the political leaders of the EU. For a while, the narrative has been that the European economy is rebounding and that unemployment is falling. I have maintained all along that there are no signs of any such recovery, and on Friday Eurostat released a report that begins to backtrack from the unwarranted optimism. However, as the EU Observer reports, the narrative has changed somewhat, now putting focus on differences between member states rather than the absence of any downward trend across the EU:

Figures released on Friday (2 May) by the EU’s statistical office, Eurostat, indicate large differences remain in unemployment rates across member states. The eurozone unemployment rate was 11.8% in March 2014, stable since December 2013, but down from 12.0% in March 2013 With an 11.8 percent overall jobless rate in the eurozone, the chances of people landing a job remain low in countries like Greece and Spain when compared to Austria and Germany. At 26.7 percent, austerity-hit Greece still has the worst unemployment rate in the EU, followed closely by Spain with 25.3 percent. Austria at 4.9 percent and Germany at 5.1 percent have the lowest.

There is a good reason why the new story in Europe is about differences between member states rather than the overall trend. Figure 1 reports quarterly data on total unemployment, not seasonally adjusted, for the EU as a whole and for the euro zone specifically:

Figure 1


Yes, there are differences between member states, but the differences become pointless of there is no overall positive trend in unemployment. Germany is a good example, with an unemployment rate at 5.5 percent in the first quarter of 2014. While this is low by European standards, it is important to note that there is no strong downward trend in these numbers. Yes, measured over the same quarter a year before (e.g., first quarter of 2014 compared to first quarter of 2013) the Germans do see a slow, weak but nevertheless visible improvement. However, the rate still fluctuates from quarter to quarter by as much as a half percentage point, showing somewhat of a weakness in the trend.

Figure 2 highlights further the lack of trend in unemployment:

Figure 2


Most notably, Greece and Italy have not yet reported full data for the first quarter of this year. So far their trends point steady upward, though numbers that I reported previously on the Greek GDP give us reason to believe that unemployment will be flat in early 2014. Italy is a more uncertain case, partly due to growing talks about the country leaving the euro.

It is positive, no doubt, that both Spain and Ireland saw a decline in unemployment in the first quarter of 2014 (the second quarter in a row for Ireland with a decline). However, at the same time French unemployment is steadily on the rise, a fact that, given the size of the French economy, will have hampering effects on any possible recovery in other euro-area countries.

As we return to the EU Observer story, we can hear the frustration echo through the EU head quarters:

EU social affairs commissioner Laszlo Andor called for more investment into job creation. “The ultimate factor that will determine Europe’s economic future is whether we can hold together and further strengthen our Economic and Monetary Union, or whether we let weaker members of the EU and of our societies drift away,” he said. Earlier this year, Andor warned that one in four Europeans is at risk of poverty, despite unemployment figures dropping in some member states. Young people are the worst affected by the unemployment crisis. Only around one in four people of working age under 25 have a job. To offset the trend, the EU last summer launched its Youth Guarantee scheme with a promise to help the young find jobs, continue their education, or land a traineeship within four months of becoming unemployed or leaving formal education. EU money to support the scheme is primarily sourced from the European Social Fund (ESF).

Which is built by, and maintained by, Europe’s taxpayers. Instead of doing something about the high taxes and other factors that prevent Europe’s entrepreneurs from creating jobs, the EU taxes people more so it can give money to the young men and women who cannot get jobs because of the high taxes.

Of course, as the EU Observer story continues, spending taxpayers’ money to create jobs is about as hopeless a project as trying to ride a bicycle in zero gravity:

But given the scale of the problem, the EU plan has been criticised for being underfunded and lacking in ambition. The Brussels-based European Youth Forum in a study out in April on ten member states says the scheme has yet to live up to its promises. “It is a good way of tackling youth unemployment but effectively so far there hasn’t been enough ambition in it and enough political will in some member states to implement it properly,” said a European Youth Forum spokesperson.

Wrong. The reason why it has not yet been successful is because it is a government program, spending taxpayers’ money when taxpayers should really be allowed to keep their money and spend it as they see fit. Because of the high taxes across Europe, only countries with strong exports industries are able to pull ahead (Germany and Austria are good examples). Until government rolls back its presence in the economy – on both the spending side and the taxation side – Europe will be stuck with its disastrously high unemployment levels. Temporary changes up or down will not make any difference over time.

Jobless Europe

Recent unemployment data from Eurostat gives yet another grim picture of the European economic landscape. The EU Observer reports:

Over two-dozen regions throughout the Union have an unemployment rate twice the EU average. The data, published on Wednesday (16 April), by the EU’s statistical office Eurostat, says the jobless rate in 27 regions in 2013 was higher than 21.6 percent. Thirteen are found in Spain, 10 in Greece, three in the French Overseas Departments, and one in Italy. Five of the worst affected are found in Spain alone.

There is a strong relationship between unemployment and growth. In fact, over time the only way that the private sector can create jobs is if the economy as a whole is growing. With GDP growth at deplorable levels in the EU, there simply is no way for the economy to solve the unemployment problem.

The EU Observer again:

At 36.3 percent, Spain’s Andalucia tops the overall unemployment regional figures, followed closely by Ceuta, Melilla, Canarias, and Extremadura. Youth employment is worse. Young people are twice as likely to be unemployed, when compared to the average unemployment rate, in more than three quarters of all the EU’s 272 regions. Ceuta tops the list of youth unemployment with a 72.7 percentage, followed by Greece’s Dytiki Makedonia at 70.6 percent and Ipeiros at 67.0 percent.

These regions are nothing short of economic disaster zones. As I explain in the linked growth article above, there is very little economic value being created in the European economy that can translate into new jobs. At best, the unemployment situation is not getting worse – it is the herald of Europe’s new era of economic stagnation.

Back to the EU Observer:

The data also showed that over 47 percent of people without work have been unable to find a new job after a year. … Around 75 percent of the unemployed in Slovakia’s Vychodne Slovensko region are also unable to find a job after a year.

In fairness, as the EU Observer notes there are some islands in this sea of economic depression where conditions are a bit more normal:

At the other end of the spectrum are Germany, Austria and Sweden. At 2.6 percent, Germany’s Oberbayern region had the overall lowest unemployment rate. Both Freiburg in Germany and Salzburg in Austria tied at 2.9 percent. Oberbayern, along with Tubingen, also ranks as having the lowest youth unemployment rate at 4.4 percent with Freiburg coming in at a close second. Long-term jobless rates are the lowest in six Swedish regions, which includes Stockholm.

In January I explained that the German economy is on the downslope, with key GDP components gross exports and private consumption coming to a standstill last year. 

As for Sweden, nationwide unemployment is a hair below eight percent, with youth unemployment at three times that rate. Recently there have been microscopic changes for the better, but that is coming to an abrupt end with the new fiscal policy plan that Treasury secretary Anders Borg announced back in February: tax hikes, tax hikes and tax hikes.

There is one more caveat with the low unemployment numbers in, primarily, Sweden. Government has a large share of the workforce on its payroll.

Europe Downgraded

And the European debt crisis rolls on

Standard&Poor’s, one of the leading US-based ratings agencies, on Friday (20 December) downgraded EU’s rating by one notch to AA+, citing concerns over how the bloc’s budget was funded. “In our opinion, the overall creditworthiness of the now 28 European Union member states has declined,” Standard&Poor’s said in a note to investors. Last month, it downgraded the Netherlands, one of the few remaining triple-A rated EU countries. In the eurozone, only Germany, Luxembourg and Finland have kept their top rating.

Not surprising. The Netherlands experienced a very tough budget fight in 2012, with a resigning prime minister, upsetting elections and, during 2013, a close encounter with harsh austerity policies. This was not exactly what the Dutch had expected that they would be subjected to. Or, as I explained the situation in March 2013:

The Dutch government, which has been clearly in favor of tough austerity measures on southern European economies where the deficit exceeds the three-percent limit, now suddenly recognizes that austerity is bad for GDP growth. To play on another American proverb, life is not as fun when the austerity chickens are coming home to roost.

Evidently, the Dutch austerity measures did not prevent a credit plunge. Back now to the EU Observer story about the Standard & Poor downgrading:

The agency noted that “EU budgetary negotiations have become more contentious, signalling what we consider to be rising risks to the support of the EU from some member states.” EU talks for the 2014-2020 budget took over a year as richer countries – notably the UK and Germany – insisted on a cut, while southern and eastern ones wanted more money.

And herein lies the gist of why S&P is worried. The EU budget fight is about countries with better government finances wanting to pay less to countries with troubled or outright catastrophic government finances. If there is a cut in EU funds to Spain, Portugal or Greece, those recipient countries will have to take even tougher measures to try to comply with the budget balance targets set by the EU and the ECB. Given that they are already chronically incapable of doing so, it is not hard to see why S&P is very concerned with cuts in the EU budget.

This message, though, seems lost on some Eurocrats:

The news struck just as EU leaders were gathering for their last day of a summit in Brussels. European Commission chief Jose Manuel Barroso dismissed the rating downgrade. “We have no deficit, no debt and also very strong budget revenues from our own resources. We disagree with this particular ratings agency,” the top official said in a press conference at the end of the EU summit. “We think the EU is a very credible institution when it comes to its financial obligations,” Barroso added. … EU Council chief Herman Van Rompuy downplayed the S&P decision. “The downgrade will not spoil our Christmas,” he said.

Perhaps we should not expect anything else from them. After all, the Eurocracy in Brussels has proven, over and over again, that it lacks insight, interest and intelligence to successfully deal with Europe’s perennial economic crisis. This is in itself a troubling fact, as the signs of a continuing crisis are everywhere for everyone to see. A good example, also from the EU Observer:

The number of people unemployed in France rose 0.5% to over 10.5% in November, figures released Thursday show. The statistics are a political blow for President Francois Hollande who had pledged to bring the rate down by the end of 2013. The figures for December will be released end January.

The Eurocracy’s refusal to see the big, macroeconomic picture is also revealed in their delusional attitude toward the EU’s crisis policy:

The EU says Spain’s banks are back on a “sound footing,” but one in four Spanish people are still unemployed. Klaus Regling, the director of the Luxembourg-based European Stability Mechanism (ESM), made the statement on Tuesday (31 December) to mark the expiry of Spain’s EU credit line. He described the rescue effort as “an impressive success story” and predicted the Spanish economy will “achieve stability and sustainable growth” in the near future.

The only problem is that the crisis in the Spanish banks was not the cause of the economic crisis. The welfare state was the cause. Europe’s banks actually suffered badly from the crisis by having exposed themselves heavily to euro-denoted Treasury bonds: when Greece, Italy, Portugal, Spain, Ireland and even countries like Belgium and Netherlands started having serious budget problems, Treasury bonds lost their status as minimum-risk anchors in bank asset portfolios.

With trillions of euros worth of exposure to government debt, Europe’s banks rightly began panicking when in 2012 Greece forced them to write off some of the country’s debt. The debt write-off was directly linked to a runaway welfare state, whose spending promises vastly exceeded what Greek taxpayers could ever afford. The same problem occurred in Spain where the government’s ability to pay its debt costs have been in serious question for almost two years now.

To highlight the Spanish situation, consider these numbers from Eurostat:

  • In 2007 the consolidated Spanish government debt was 382.3 billion euros, of which financial institutions owned 47 percent, or 179.7 billion euros;
  • In 2012 the consolidated Spanish government debt was 883.9 billion euros, of which financial institutions owned 57.5 percent, of 507.9 billion euros.

In five short years, Spanish banks bought 382.2 billion euros worth of government bonds. During that same time, the Spanish government plummeted from the comfortable lounges of good credit to the doorstep of the financial junkyard.

It was also during this period of credit downgrading that the Spanish government began subjecting the country to exceptionally hard austerity measures, the terrifying effects of which I have explained repeatedly. However, as today’s third EU Observer story reports, those effects are of no consequence to the Eurocracy, whose praise for austerity will soon know no limits:

He also praised the EU’s austerity policy more broadly, saying: “The people’s readiness to accept temporary hardship for the sake of a sustainable recovery are exemplary … The Spanish success shows that our strategy of providing temporary loans against strong conditionality is working.” Spain will officially exit its bailout later this month, after Ireland quit its programme in December. Unlike Cyprus, Greece, Ireland and Portugal, the Spanish rescue was limited to its banking sector instead of a full-blown state bailout. It saw the ESM put up a €100 billion credit line in July 2012. In the end, the ESM paid out €41.3 billion to a new Spanish body, the Fondo de Restructuracion Ordenado Bancaria (FROM), which channelled the loans, most of which mature in 2024 or 2025, to failing lenders.

So all that has happened is that European taxpayers have been put on the hook for failed Spanish bank loans – loan defaults that Spain’s banks could have dealt with had they not chosen to lend a total of half-a-trillion dollars to their failing government.

Nobody seems to ask how this debt restructuring will help the Spanish government end its austerity policies. Such an end is a must if the Spanish economy is ever to recover. That does not mean a return to “business as usual” under the welfare state – on the contrary, the welfare state must go – but what it does mean is some breathing room for the private sector to regain its regular, albeit slow, pace of business.

Instead of connecting the dots here, the Eurocracy continues to look at the European economic crisis through split-vision glasses, and Spain is no exception. The EU Observer again:

For its part, the European Commission last month warned that the Spanish economy is still in bad shape despite the good news. It noted that “lending to the economy, and in particular to the corporate sector, is still declining substantially, even if some bottoming out of that contraction process might be in sight.” Meanwhile, the latest commission statistics say 26.7 percent of the Spanish labour force and 57.4 percent of its under-25s are out of work. The labour force figure is second only to Greece (27.3%) and much higher than the EU’s third worst jobs performer, Croatia (17.6%). … A poll in the El Mundo newspaper published also on Wednesday showed that 71 percent of Spanish people do not believe they will see any real benefit from Spain’s recovery until 2015 at the earliest.

All this ties back to the Standard & Poor downgrading of the EU. There is, plain and simple, a lot of concern that nothing is going to get better in the EU. There are good reasons to believe this: the persistent message from Brussels over the past two years has been that the next austerity package will be the last, that it will turn things around and put depression-stricken economies back on track again. As we all know, that has not happened, which raises the question if the EU is going to have to actually increase its bailout efforts toward fiscally troubled member states.

This blog’s answer is “yes, very probably”. Europe’s only way back to prosperity and growth goes through the structural elimination of the welfare state.

Europe’s Wishful Recovery Thinking

Sometimes it is easy to gauge the level of desperation over the crisis in Europe. The EU Observer provides two good examples, the first on unemployment:

Unemployment in the eurozone fell for the first time since February 2011, according to figures released on Friday (29 November). The jobless rate fell to 12.1 percent in October 2013, according to EU statistical agency Eurostat, down from 12.2 percent in September, leaving 19.3 million people out of work.

That sounds good until you start looking at the actual numbers from Eurostat. The truth is this:

2013M01 2013M02 2013M03 2013M04 2013M05 2013M06 2013M07 2013M08 2013M09 2013M10
EU-28 11.0 11.0 10.9 11.0 11.0 10.9 10.9 10.9 10.9 10.9
Euro-17 12.0 12.0 12.0 12.1 12.1 12.1 12.1 12.1 12.2 12.1
USA 7.9 7.7 7.6 7.5 7.6 7.6 7.4 7.3 7.2 7.3
Japan 4.2 4.3 4.1 4.1 4.1 3.9 3.8 4.1 4.0 4.0

As these seasonally adjusted monthly figures show, the American unemployment rate has come down 0.6 percentage points since the beginning of the year. During that time the EU has been practically stalled at eleven percent. The Euro area is not going anywhere either from its 12-percent level.

What the EU Observer elevates to a “fall” in unemployment is literally the reversal of the euro zone’s temporary uptick in September. To call this a fall in unemployment is about as honest as to use the warm weather at noon as a sign of global warming.

As always, we should also check in on youth unemployment:

2013M01 2013M02 2013M03 2013M04 2013M05 2013M06 2013M07 2013M08 2013M09 2013M10
EU-28 23.7 23.6 23.4 23.5 23.5 23.6 23.6 23.6 23.7 23.7
Euro-17 24.1 24.0 23.9 23.9 23.8 24.0 24.0 24.1 24.3 24.4
United States 16.8 16.3 16.2 16.1 16.3 16.3 15.6 15.6 15.2 15.1
Japan 7.3 6.6 6.5 8.1 7.1 6.4 6.0 7.0 7.3 6.5

Again, the U.S. economy handily beats Europe with a decline by 1.7 percentage points since January. If there is any trend in the European numbers, it is for the worse, a very good reason for Europe’s political leaders to not let themselves be blinded by the non-fall in total euro-zone unemployment.

As for the worst performers in this division, Greece has not reported youth unemployment since August (artificially holding down the euro number) when their rate was 58 percent. The October number from Spain is 57.4, the highest monthly Spanish rate thus far this year. Croatia reported a rate of 52.4 percent in September, also the highest for the year. Let us pray that when their October rate comes in, it bucks the trend.

Now for the second example of desperately promoted “good” news in the EU Observer story:

Meanwhile, on a mixed day for the eurozone economies, the Netherlands became the latest eurozone country to lose its triple-A credit rating from rating agency Standard and Poor’s. Germany, Finland and Luxembourg are now the only remaining countries to hold the top-rating. However, there was better news for Spain and Cyprus. Standard and Poor’s uprated Spain’s economic outlook to “stable” after data showed that its economy grew in the third quarter of 2013 after more than two years of recession.

That growth was over the previous quarter, and not in seasonally adjusted numbers. In short, it says nothing about what is happening on the ground. To find that out we have to compare the third quarter of 2013 to the third quarter of 2012, which gives us a Spanish GDP growth rate of -0.7 percent. In other words, it is still shrinking. It is the “best” figure in two years, but until we see an actual growth number in year-over-year quarter numbers there is no reason to believe the economy has turned a corner. Furthermore, with unemployment in general stuck at its high level and youth unemployment still climbing it is pointless to even think about an economic recovery.

I understand perfectly well that the Europeans want to get out of their deep, endless economic recession. But you do not get out of it by clinging to superficial economic data. You get out of it by turning a real macroeconomic corner. That, in turn, requires substantial reforms to the role that government plays in the European economy.

Franco Fascism Returns in Spain

Back in February I asked if Europe can stop rising nationalism within its borders. I concluded:

Europe in general is so deeply entrenched in the defense of big government that its leaders have a very weak gut reaction to authoritarianism. This is especially true on the socialist flank, but it applies almost as strongly to nationalism.

Right after World War II the countries of Western Europe started building and expanding welfare states. Originally they followed slightly different paths, with Scandinavia going for the full-blown socialism-light model while Germany and Britain kept their welfare states more in line with what has often been classified as “social conservatism”. Over time, though, the differences between the various welfare states have been blurred and almost vanished. Today, Europe is little more than one big mess of income redistribution, decaying socialized health care, destructive entitlement dependency and widespread hopelessness.

Life under this slowly declining welfare state is not much different than life under the late-stage Communist dictatorships in Eastern Europe. Europeans can still vote for nominally dissenting parties for their legislatures, but the most important pillar of parliamentary democracy – freedom of speech – is slowly withering away. The immediate motive for reining in free speech is to expand tolerance, but in reality the purpose is to thwart debates about the increasingly devastating effects of austerity and attempts at preserving the welfare state.

When 20 percent or more of the young are unemployed in 20 member states, and when entitlement dependency has created large areas in Europe’s big cities, filled with pacified immigrants, crime and religious extremism, it is not far-fetched to see what explosive forces are at work. But instead of breaking a vicious, downward spiral of industrial poverty, despair, crime, social disintegration and surging political radicalism, Europe’s political leaders double down on their path to the economic wasteland. Instead of opening up an honest, informed debate about where Europe is actually heading, they create new, draconian restrictions on freedom of speech.

The reaction from regular Europeans is going to be as predictable as the idiotic commitment of the Eurocracy to an ever expanding, ever more authoritarian “democratic” government. As the political elite of the EU and the member states continue to grow the super-state; as they continue to centralize power to Brussels and put more and more invasive measures in place to rein in the lives of Europe’s already heavily regulated citizens; an ever growing number of those citizens will look for simple-solution delivering political movements.

As the political elite blurs the distinction between democracy and totalitarianism, the ability of democracy to resist totalitarianism will rapidly become weaker. This was my conclusion in February of this year, and I continue to stand by that conclusion.

I have received a few rather snotty comments on this matter. I have only one thing to say to the simple-minded “enlightened” political elitists behind those comments: Never bark at the big dog. The big dog is always right. From the Christian Science Monitor:

Extreme, neo-fascist groups in Spain are preparing for a show of force during this weekend’s nationalist holiday, and Spanish authorities are keeping a close eye on the situation. But experts worry that the real fascist concern in Spain is not from small extremist groups, but rather from growing public displays of fascist sympathies by a small part of the conservative government’s constituency – and even among elected officials.

With the exception of Greece, Spain is the country in Europe that has suffered the worst as a result of the economic crisis. Their overall unemployment rate is nearing Greek levels and their youth unemployment is only a few ticks behind Greece. Middle-class Spaniards have become food scavengers to survive, wages are falling for those who still have jobs, the crisis is still deepening, austerity policies have driven up taxes to a point that inflation in this unemployment-ridden country is actually on the rise, home-owning Spanish families default in droves on their mortgages, and the overall economic, social and political situation is becoming downright explosive.

Is there any wonder that wealthier provinces are considering secession as a last-resort attempt at preserving whatever they can of their prosperity?

The sensible response to this would, of course, be that the national government abandons the current path of trying to save the welfare state in the midst of an ever deeper economic crisis. But that notion is not even on the political radar screen in Europe – let alone in Spain. Instead, the only alternative to the current policies that seem to have any legs is apparently Franco fascism.

Spain was ruled by a fascist dictator for 40 years. There are still millions of Spaniards who remember Franco, just as there are millions upon millions of East Europeans who remember the bad old days of the Soviet era. When parliamentary democracy fails to deliver a prosperous future, people are more inclined to consider alternatives even if those alternatives are loaded with totalitarianism. When unemployment among the young exceeds 50 percent, selective memories of a bygone era become dangerous challengers on the contemporary political scene.

So far, the radical fascist and Nazi groups in Spain are not within reach of the influence that Golden Dawn has achieved. But that could easily change – and change quickly. Christian Science Monitor again:

An alliance of radical right groups – including violent neo-Nazi ones – have mobilized to travel from around the country to Barcelona to protest Catalonian nationalism on the October 12 “Día de la Hispanidad,” or “Hispanic Day,” holiday. Authorities said Thursday they plan to prevent violent groups from entering Catalonia. The holiday march is held annually, and is normally small and peaceful. But the nationalist undertones of Hispanic Day – which originally commemorated Christopher Columbus’s discovery of the American continent until was renamed in 1958 by the fascist regime of General Francisco Franco – make it a flashpoint. Five groups – including violent neo-Nazi cells and a political party that the Supreme Court is considering banning – in July formed a common platform called “Spain on the March.”

And you thought the welfare state would build a bulwark against totalitarianism? Precisely the opposite is true. The welfare state is the inevitable pathway to totalitarianism.

The weekend march is not an isolated incident. As Catalonian plans to hold a referendum on independence move forward, the extreme right has re-energized, even if it remains small compared to the resurgent movements in Greece, France, and elsewhere. Last month, a dozen radicals forced their way into a library where Catalonians were commemorating their own national day, injuring several people and tearing down Catalonian symbols. Police arrested them in the aftermath.

And we are not talking some fringe group here:

Police estimate there are about 10,000 members involved in violent extreme right groups. They lost political representation in parliament in 1982, seven years after Franco died. But they didn’t disappear. They melded into the now governing PP. The concern is not so much over the very small group of violent groups, which authorities constantly monitor. These are mostly contained, experts agree. The real problem is in from those within the government’s ruling party that sympathize ideologically – even if they condemn the use of violence.

The “trains-ran-on-time” myth about fascism has never quite died in Europe. And again, today’s democratically elected leaders in Europe are lending a hand to those who have kept that myth alive. The Eurocracy and their errand runners in national parliaments are carving away at parliamentary democracy, little by little. First they shoved austerity down the throats of Greek, Spanish, Italian, Portuguese and French voters; when voters protested, the political elite appointed their own leaders in place of elected ones to govern austerity-ridden countries. And now the same elite is putting barb wire around free speech. The Monitor again:

The political heirs of Franco merged with the PP [now governing Spain], which is ideologically a center-right party. And amid the eurocrisis, they could gain more political clout that could be significantly more dangerous than the violent groups, experts warn. The government has been criticized by the opposition, regional governments, and human rights groups for condoning fascist public support among its own followers – which even if small in number, were unheard of until recently – even if violent groups are suppressed. Such criticism arose again on Thursday, when PP legislators voted down a motion like that in the Catalonian parliament to criminalize public support for fascism, Franco, and the Nazis.

As abhorrent as fascism is, have speech bans elsewhere in Europe killed that ideology? Obviously not. Such speech bans seriously under-estimate the citizenry. The only thing they do is put on full display the arrogance of the political elite, including their bizarre belief that every aspect of society can be politically engineered.

You would think that seven long decades of Soviet Communism would be evidence enough. You would think that by now they had learned to attack the underlying reasons why people turn to radical, totalitarian ideologies. But while the political and cultural elite in Europe is quick to explain away radical Islamism with social and economic factors, they still believe that a simple speech ban can keep people from turning to other versions of oppression.

Evidently, Europe’s biggest deficit is in political adulthood.

But there is more. The story in the Christian Science Monitor gives chilling examples of a Franco resurgence in Spain, of proportions that should send a chill down the spine of every freedom-minded individual on the Iberian peninsula – and elsewhere. Click here and read it all. It is well worth your time.

Can Lower Wages Save Europe?

Economic despair is widespread in Europe today. But there are also signs of emerging economic desperation. That is, desperation among politicians that their prescribed medicine – austerity – is not doing the trick. Unemployment keeps rising while budgets do not balance despite years of spending cuts and tax hikes.

No wonder some politicians put their faith in even more desperate measures, such as widespread pay cuts for private-sector workers. From The Guardian:

Wages have fallen across Spain in the past year as the government tries to cheapen labour for employers just as austerity measures cut back the welfare state. Salaries fell by an average of 0.6% in the year to the first quarter, with inflation pushing the real loss in the purchasing power of those Spaniards in work to 2%. Private sector salaries were harder hit than those of public employees.

The Spanish unemployment rate is still rising and is now 27 percent. This puts a massive downward pressure on wages, but also rapidly extends jobless lines.

There is nothing inherently wrong with wages taking a nosedive in a recession: the wage is the price of labor and if labor is in excess supply the price needs to fall as part of the free-market adjustment process to restore full employment. But when wages are pushed down as part of a policy package to save big government, then there is no free market at work here, only cynical politicians:

Falling wages are seen as good news by prime minister Mariano Rajoy’s conservative People’s party government, which believes wage devaluation is one of the few options left to Spain now it is part of the euro and can no longer devalue its own currency. “This will help us become more competitive,” the country’s employer’s federation said.

Spain is in the middle of a multi-year process of trying to close its budget deficit by means of austerity. The national government is putting its faith in tax hikes and cuts in government spending, hoping they will close the deficit, thereby push interest rates down and as a result increase private-sector investment.

The theory behind austerity is flawed, and that is clearly visible in the Spanish, Greek, Italian, Irish, French and Portuguese economies. In 2012 alone these countries lost a total of 49.4 billion euros worth of GDP as a result of austerity. This is money that is not spent in the private sector – sales lost by European businesses – roughly equivalent to 700,000 private-sector jobs. And that is before we even consider the multiplier effects.

So if the purpose of austerity was to balance the government budget and thus push interest rates down, what is so wrong with this leading to wage drops?

Here is the problem. There is a goal embedded in the budget balancing itself. It is not explicit, but implicit and visible only in the fact that the budget balance, not the size of government, is the target of austerity policies. If austerity was all about shrinking government the policies would be designed to achieve that goal, but they are not. There are no terminations of spending programs in austerity, and the quantitative goals in each austerity package, from Greece to Italy to Spain and on, are set in terms of reduction of the deficit, not reduction of the size of government.

This means that austerity is an instrument to preserve the welfare state. The premise behind austerity is that the welfare state intrudes on private-sector activity with its budget deficit. Therefore, the goal with austerity is to make sure the welfare state can continue to exist without imposing an extra burden on the private sector through higher interest rates.

Since austerity has dramatically increased Spanish unemployment, and since unemployment is driving wages down, the real reason for the wage drop is that the government wants to preserve its welfare state – not that it wants an economy where free-market principles rule. It has already increased taxes and cut government spending, thus imposing massive explicit and implicit tax hikes on Spanish families; the wage drop, forced upon workers by austerity, is the redeeming instrument, so to speak, that government employs in order to help the economy recover some of the jobs it has lost.

Needless to say, for this to work the Spanish economy has to turn to the world beyond its borders. The combination of higher taxes and lower wages is a strong guarantee that domestic demand, especially consumer spending, will remain depressed for years to come. The Spanish government is aware of this and therefore chooses to rely on export demand to pull the economy out of its perennial crisis.

All this while the government manages to preserve the welfare state and shield government workers from some of the tougher pay cuts that private-sector employees have to take.

It is difficult to say how far the European crisis can continue in its current state. When an economic crisis reaches a boiling point it usually spills over into massive social unrest and leads to radical political changes. Those changes are usually not for the better and would certainly do a lot of harm to Europe, but with the economy inching further down into the abyss one has to ask how much worse things could actually get.

The broader scope of that question is for another day, another article. Today, though we have noted yet another absurd twist to the crisis, namely the Spanish wage cuts that aim to preserve big government and make workers in the private sector pay yet another bill for an over-bloated welfare state.

Perhaps it is not surprising that the debate over austerity in Europe is intensifying. From the Economics Blog at the leading British newspaper The Guardian:

Another month, another dismal set of jobless figures from the eurozone. Unemployment was up by 95,000 in April and if the trend of the past three months continues, an unenviable milestone will be reached by Christmas. At that point, there will be 20 million on the dole in the 17 nations that use the single currency. Europe now faces a triple crunch: an interlocking human, economic and political crisis that will have devastating consequences if left unattended.

Absolutely. The destruction now being done to Europe is unprecedented because it is coordinated, deliberate and rationally (as in “planned” and “legislatively driven” – not “reasonable” or “smart”) enforced by governments across the continent.

The phrase “lost generation” can be over-used: on this occasion it is entirely appropriate to describe what is happening in Greece, where the youth jobless rate is approaching two-thirds of the young population.

And not just there. As I reported yesterday, in both Greece and Spain youth unemployment is above 50 percent. Four other European countries, Croatia, Portugal, Italy and Slovakia, record youth unemployment above one third. A total of 19 European states have unemployment rates above 20 percent for the young.

Back to The Guardian’s Economics Blog, which makes an astute observation:

The eurozone’s prolonged slump has forced some modest changes to deficit reduction plans, giving some member states longer to hit their targets. But Europe still appears a long way from embracing the sort of strategy that would start to bring the jobless total down. In part, that’s because there is still a belief that the impediments to growth are all structural and have nothing to do with a deficiency of demand.

Indeed. Higher taxes, increased net drainage of money from the private sector to government, and falling wages all conspire to reduce total demand in the economy. Thereby the continuation of the recession, even its deepending, is essentially written in stone.

The pressing question now is: when higher taxes and lower wages don’t do the trick, what will the desperate governments of Europe’s ailing welfare states do next?

In the Ruins of the Welfare State

Sweden’s capital Stockholm is surrounded by rundown, crime-ridden public housing projects. For the fourth night in a row these housing projects are erupting in riots, encircling Stockholm with a ring of burning cars, firebombed schools, with garages, recycling stations and other structures engulfed in flames. Mobs of immigrant youth – of which there are plenty in Sweden – attack shopping centers, mass transit and even fire and rescue teams called out to put out the fires they start.

The mobs aggressively charge at police, hurling rocks and other objects at them. They have vandalized at least two police stations and one train station. Last night (Wednesday), the fourth night in a row with riots, the unrest spread to most of the housing projects around Stockholm (there are two about dozen, each of them with roughly 8-10,000 residents). Cars and other property were being burned on at least 15 locations around the capital.

The riots are beginning to spread to other cities, primarily Gothenburg, Malmö and Uppsala. An inept government is sitting on the sidelines, confounded and clueless like Chamberlain when Hitler invaded Poland.

Sweden is just one example of a welfare state in decline and disintegration. The housing projects where the riots are erupting often have unemployment rates above 50 percent, with the vast majority of the residents being dependent on welfare. Contrary to the general perception in Europe as well as in America, Sweden is not a peaceful society that went through the recession largely unscathed. Their government finances are in good order, but that only means that they have over-taxed the private sector for a very long time, combined with moderate but frequent cuts in welfare programs. The cumulative effect over time has been that the private sector is being drained for life blood by taxes while the spending cuts are pushing the most vulnerable people into utter despair.

It is hardly surprising that Sweden has one of the highest crime rates in the industrialized world.

Unlike other countries in Europe, Sweden has been subject to a slow but steady austerity policies. Instead of causing an eruption of social and political protests at once, as has happened in countries like Greece and Spain, this Swedish strategy has worked like a slowly progressing venom in the economy. Eventually, the pressure from these cuts, combined with equally slow-progressing cuts in health care, public education and general income security programs, break out in one big eruption.

That is not to say there were no warnings. In my book Remaking America I tell the behind-the-scenes story of a crumbling welfare state, of how a young, frustrated generation burns down hundreds of public schools every year and how practically every social institution under the realm of the welfare state has turned from being benevolently user-friendly to being maliciously focused on balancing their budget under steady spending cuts.

Since the welfare state still maintains monopoly on all its services, people whose lives are being cut by austerity have nowhere else to go. The result is riots, social unrest, high crime rates and political extremism.

We are seeing all of this in Sweden, and in many other European countries. What we are not seeing is a realization among Europe’s political and intellectual leaders of how deep the crisis really is. George Friedman, chairman of Stratfor, provides an excellent analysis at RealClearWorld.com:

Spain invites endless historical considerations, but on this trip I was struck by something more immediate and prosaic. We were on the road from Granada, near the coast, to Madrid, the capital in the center of the country. It was a four-lane highway, what Americans would call an interstate. The road was clean, well maintained and, as we moved north, nearly empty. Every few kilometers a car would pass in the opposite direction, or we would run alongside another car heading north. It was not the paucity of cars that struck me; it was the almost complete absence of trucks. This was, after all, the road from the coast to the capital, not the only road but still a significant one. It was early afternoon on a weekday. The oddest moment came when we reached a tollbooth not too far from Madrid. There was only one booth open and when we pulled up there was no one in it and no coin or credit card slot. We waited, then we left. Perhaps the attendant was in the bathroom. Perhaps the revenue didn’t justify paying a toll taker. Perhaps this was one of the austerity measures they had taken. I will never know. What I do know is that the drive had a sort of post-apocalyptic feel, except that it was very clean.

A glimpse of an economic wasteland, emerging from the rubble as the austerity storm moves to the next country.

We marveled at it and then realized that there was nothing that ought to have surprised us about it. The unemployment rate in Spain is more than 27 percent. Gasoline costs 1.4 euros a liter (more than $6.50 a gallon). At that price, a drive is no longer a casual undertaking; it has to justify itself. As for trucks, when that many people are out of work — and have been for many months — the demand for goods declines to the point that trucks will be rare on the road.

An excellent way to put abstract reasoning into a real-world context. But there is more:

We stayed in a very nice hotel in Granada. In the morning when we left the hotel, there was a beggar sitting on the sidewalk, his back to the wall, to our right. … He was in his mid-to-late 20s, wearing glasses and reading a book. He was dressed in khakis and a decent shirt. He wasn’t mad, he wasn’t drunk and he wasn’t like the hippies of my youth. He wasn’t playing an instrument. He was sitting, absorbed in a book and begging. There were other beggars in Granada of the more conventional sort but also several more who looked like this one.

Youth unemployment in Spain is epidemic. It almost tripled in six years, from 17.9 percent in 2006 – a disturbingly high number in itself – to 53.2 percent in 2012. Preliminary numbers for 2013 point to 57 percent and rising.

An entire generation is being sentenced to a life in the ruins of the welfare state. The consequences of this are almost unfathomable. Friedman again:

When a young man is unemployed because he is a musician or an artist awaiting discovery or because he has lived carelessly, that’s one thing. But this is different unemployment. It is a generation whose dreams are shattered. They may have hoped to be a businessman or a craftsman, but that’s not going to happen now. Unemployment of this sort doesn’t go away in a few months or years. This is the level of unemployment the United States experienced in the Great Depression, the kind of unemployment that scars an entire generation.

Just as the Great Depression was prolonged by reckless welfare-statist policies, the crisis in Europe has taken a choke hold on the economy and is not going to let go any time soon:

No one knows how long this will last but everyone suspects that it will be a long time, and I share that suspicion. How do you accept a situation that says you, at the age of 22, will live on the margins of society along with half of your friends? More important, how do you live with that fact if you worked hard preparing for a career? … when nearly half a generation, most from middle-class families, finds itself at the bottom, there is no explanation to provide solace.

One of the factors that define industrial poverty is that the growing generation will live a life less prosperous than the life their parents have. Europe has been on the doorstep of industrial poverty for some time now, and this economic crisis was all it took to push the entire continent over the edge. And they will not climb back up again in at least a generation.

If the political leaders of Europe stick to defending the hollowed-out welfare state as a political ideology, the continent is doomed to being an economic wasteland for the rest of this century.

Add to that the risk for political extremism. Friedman sees this, too:

In its place there is, quite reasonably, a sense of victimhood. Whatever explanation one gives for the Spanish crisis — the stupidity of politicians, the laziness of the public, the greed of bankers or whatever else — the generation that is bearing the burden is the only one that is not guilty — at least not yet. This — being the victim in personal calamity shared by half a generation — is the foundation not just of political instability but also for the politics of rage. The older middle-class citizens, with the lives they thought they had secured shattered, hurled into the ranks of the permanently impoverished, represent the vanguard, if you will. But those who will never live the lives they thought they would, they are the explosive mass.

Then Friedman makes an outstanding observation:

I think the reason things are so calm — occasional riots hardly count — is that no one really believes that they won’t awake from the nightmare. There is a firm belief that this period will end. The denial of what has happened is not confined to Spain.

When the denial washes away; when one million young, unemployed, Spaniards join forces with 645,000 young, unemployed French, 200,000 young Greeks without work and another 3.8 million young in the EU with no job to go to; when they wake up and realize that this nightmare is not going away… that is when politicians like the leaders of Golden Dawn in Greece will be there, ready to scoop up their rage, funnel their frustration into political action.

And transform Europe in a way that Stalin nor Hitler may have had wet dreams about, but neither of them was able to do.

Make sure to read the rest of George Friedman’s excellent article. He does not seem to understand the root cause of the crisis and therefore cannot prescribe any solution, but his projection of where Europe is heading is intelligent and well worth the time.