Tagged: SPAIN

Spanish Growth An Exports Bubble?

At the beginning of this year there were lots of forecasts that the European economy was going to recover. I never believed them, primarily because government was a bigger burden on the economy than ever. So far I have been proven right, which is not something I would want to celebrate. But I also want to make clear that once government pulls back from its efforts at balancing its budget with higher taxes and spending cuts, the private sector will eventually start to recover.

There is a lot of research to show this. I review the public policy part of that research in chapter 5 in my new book Industrial Poverty. My conclusion is that this kind of austerity can work – the private sector emerges growing from even the most protracted periods of austerity. However, this is not a reason to use austerity as it has been applied through most of recent history, namely as a means to save government. Instead, austerity must be redesigned to reform away government. Otherwise the private-sector recovery that follows will suffer from two ailments:

1. It will look fast in the beginning, as consumers catch up with the standard of living they lost during the austerity period; and

2. Because of the recalibration of the welfare state – permanently higher taxes and permanently lower spending – the economy will hit its full employment level at a higher rate of unemployment than before the austerity episode.

It is also important to keep a watchful eye on whether or not a recovery is external or internal. In too many European countries over the past quarter century, a recovery has come from a rise in exports, i.e., been external. The consequence of this is that the domestic economy lags behind.

To make matters worse, much of modern manufacturing in Europe consists of bringing in parts produced in low-cost countries, assembling them at a highly efficient plant in a European country and then shipping them on to their final destination. This new kind of industrial production is increasingly isolated from the rest of the economy, which means that its multiplier effects on private consumption and business investments is relatively weak. It is, in other words, no longer possible for a small, exports-oriented European country to enter a lasting growth period merely on a rise in exports.

Earlier this year I pointed to Germany as an example of the feeble macroeconomic role of exports. You can get a temporary boost in GDP growth from a rise in exports, but once that boom goes away, it will have left very few lasting “growth footprints” in the economy. It looks like the same thing is now happening in Spain, which is in a recovery, according to the ECB:

The economic recovery has gathered momentum during 2014, with GDP growing at a faster pace than the euro area average.

Going by the latest national accounts numbers from Eurostat, which for obvious reasons covers only the first two quarters of 2014, it was not until Q2 this year that Spanish GDP outpaced the euro zone: 1.1 percent real growth over the same quarter previous year, compared to 0.5 percent for the euro zone.

Before that, Spain was doing worse than the euro zone by a handsome margin.

The ECB again:

Growth has been supported by a rise in domestic demand, while the external balance has weakened substantially as a result of a slowdown in export market growth and higher imports. Domestic consumption and investment in equipment are benefitting from growing confidence, employment creation, easier financing conditions and low inflation.

Over the past year there has been a slow but steady decline in Spanish unemployment, from 26.1 percent in August 2013 to 24.4 percent in August 2014. That is very good for a people hit very hard by disastrously ill designed fiscal policies over the past three years.

At the same time, there are clear signs that this is an “export bubble”. Consider these growth numbers for the country’s GDP (quarterly over same quarter previous year):

SPAIN 2013Q3 2013Q4 2014Q1 2014Q2
Real GDP -0.6 -0.1 0.7 1.1
Private cons. -1.2 1.1 2.1 2.2
Exports 3.7 3.2 6.4 1.5
Investments -5.4 -2.4 -0.7 0.6
Government 0.5 -3.7 0.5 1.0

There is no doubt that GDP growth is improving. While 1.1 percent is absolutely nothing to write home about, as mentioned earlier it exceeds the euro-zone average. The big question is whether or not this improvement will last. The biggest concern is the exports numbers: good growth for two quarters, then a major leap up to 6.4 percent, only to fall back to 1.5 percent. (While these are not seasonally adjusted numbers, they are quarterly growth on an annual basis which neutralizes seasonal effects.) If exports fall back to tepid growth numbers below two percent, GDP growth will most likely slide back into zero territory.

However, there are a couple of other mildly encouraging factoids in these numbers. To begin with, government spending, while on the growth side, is expanding slowly at no more than one percent per year. This number does not account for financial payments, such as unemployment benefits and other income security entitlements, but they do account for government activities that involve government employees. Alas, restraint in government spending means very little effort from government to expand its payrolls to do away with unemployment.

The apparently stable growth in private consumption is in all likelihood attributable to the post-austerity effect I pointed to above. This means that we will not see 2+ percent growth for much longer; for that to happen there has to be a sustained and substantial addition of consumers to the economy who are capable of spending more than what is required for pure subsistence. This, in turn, will not happen until unemployment comes down more than marginally.

Another mildly encouraging sign is that business investments have stopped declining. The turnaround over the past four quarters is in all likelihood an attempt by exporters to expand their capacity. If the exports boom is coming to an end, so will probably investments.

To turn this fledgling recovery into a lasting trend, the Spanish government needs to address the underlying problem in its economy: the welfare state. Otherwise it will just experience spurts of growth here and there as anomalies to a permanent state of stagnation – and industrial poverty.

Ebola and Socialized Health Care

When government creates a spending program, it also makes a promise to taxpayers. So long as the sum total of those promises is small and government limited to protecting life, liberty and property, we have good reasons to believe that government can deliver on its promises. However, the more promises government makes, the fewer of those promises it will be able to keep. As government promises reach into income redistribution and services like health care, the distance between promise and provision grows into a chasm.

That chasm has opened up across Europe. As millions upon millions of Europeans have discovered, a broken government promise is not just a theoretical construct. It is harsh reality. First they were lured into dependency on government by lavish promises of being taken care of, then government walked away from its promises  – and did so without offering people a route to an alternative.

The price is paid by the people. As government fails to deliver as promised, and taxes and regulations supporting the government monopoly all remain in place, people have nowhere else to go but down. A permanent blanket of stagnation slowly descends upon the economy and a new form of industrial poverty replaces prosperity and a bright future.

This is, again, not just theory. It is harsh reality. When government asks people to trust it, and then fails to provide that trust, even ebola can slip through the cracks of the crumbling tax-funded promises. A story from the New York Times offers a chilling example:

The case is particularly worrisome to health experts because Spain is a developed country that is considered to possess the kind of rigorous infection control measures that should prevent disease transmission in the hospital. Although the Ebola epidemic has killed hundreds of doctors and nurses in West Africa, health officials in Europe and the United States have reassured the public repeatedly that if the disease reached their shores, their health care systems would be able to treat patients safely, without endangering health workers or the public.

The story also suggests:

While the risk to hospital workers is thought to be far lower in developed countries, the infection of the Spanish nurse, along with the missteps in dealing with Ebola in Dallas, exposes weak spots in highly praised defense systems.

There is a major difference between the American and Spanish cases. In Dallas, health care workers approached the patient under the assumption that the U.S. government was right when, back in July, it assured Americans that there was no real risk that ebola would ever spread to the United States. Trusting their government, the health care professionals in Dallas used their professional skills as they have been trained, assuming that the people in charge of keeping our country safe were doing their job as promised.

Once the ebola case had been confirmed, however, our health care system, which still to a large degree is private and therefore has plenty of resources, went to work and contained what could have become a very serious outbreak.

Spain is a different case altogether. To begin with, the country has a virtually open border to northern Africa, with migrants coming daily across the narrowest stretch the Mediterranean. It is comparatively easy to travel from the epicenter of the ebola outbreak to the southern coast of Spain. But more importantly, the Spanish health care system, unlike the American, has suffered major spending cuts in the last few years. In December last year The Economist observed similarities between cuts in government health monopolies in Greece and Spain, with the Greek cuts leading to…

dramatic increases in HIV, mental illness, TB and the return of malaria. Greece made its cuts two years earlier than Spain did, so their impact became evident sooner. But the situation in Spain is just as worrying, warns Helena Legido-Quigley of the [London School of Hygiene and Tropical Medicine], who fears that if the government doesn’t change course soon, similar outbreaks could very well happen in Spain.

Specifically, The Economist notices, Spanish health care spending…

was reduced by 13.7% in 2012 and by 16.2% in 2013 (including social services). Some regions imposed additional cuts as high as 10%. As a result a significant part of the Spanish population is excluded from basic health care, which could in turn lead to public-health problems for the entire population.

As part of the 2012 cuts, the Spanish government reduced tax subsidies for medicine, a measure that was also used in Greece. The effect of these cuts is that many people simply do not get the medicine they have been prescribed – since there are no private alternatives, people are locked in to a defaulting government monopoly. Because of the high taxes needed to fund the welfare state, few Spanish families have enough money to pay privately for what they have already paid for through taxes.

With resources at hospitals being tightened, access to health care rationed and a culture of austerity spreading through the entire health care system, it is not out of the realm to ask to what extent Spain is at risk of an ebola outbreak because its government made a promise to its people that it cannot afford to keep. As an example, the New York Times story cited earlier reports that in order to treat one single ebola patient, a hospital in Madrid turned an entire floor into a sealed-off isolation unit. In a health care system with tight resources, that means the hospital has to move numerous other patients to other units or even other hospitals. This in turn means increasing the number of patients per room, or (as in Sweden) putting patients in storage rooms, lunch rooms, corridors or even patient lunch cafeterias.

In a private health care system, the supply of resources is dynamic. It depends on the public need for health care and is funded through a multiple of sources, such as insurance plans, out-of-pocket payments and charitable donations. Competition and patient choice guarantee that, over time, there is always provision of health care for all patients.

By contrast, in a government health monopoly resources are static and rigidly dependent on how much taxes the legislature can squeeze out of the private sector. If, in theory, health care were the only thing government provided, it may not be an unbearable burden to taxpayers. However, a single-payer government health monopoly is the crown jewel of the welfare state, and therefore adds up to an excessive tax bill for the private sector.

The effect is inevitably a long-time economic decline and the kind of welfare-state crisis that Spain is now experiencing. The pressing question now is: can a rationed government health monopoly protect a modern, industrialized nation from a deadly disease?

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.

LB7714Spain2

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:

LB7714Spain

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

EU28euroU

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

EUselectStatesU

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.