By now, everyone around the world has probably heard that Spain is de facto in fiscal default – i.e., bankrupt. The IMF, whose report Fiscal Monitor number 1301 presented the numbers showing that Spain is practically in default, does not offer an explicit analysis of the default scenario itself, but it gives a very illuminating background to the proliferating economic tragedy in Europe.
I will do an analysis of the Fiscal Monitor report later; for now, let’s return to Spain and the notable fact that the country has gone into effective bankruptcy despite the commitment by the European Central Bank to buy up every euro’s worth of Spanish treasury bonds. This commitment meant two things:
- owners of Spanish bonds would always be able to sell them, thus putting a mild downward pressure on the interest rate; and
- the Spanish government would be able to finance its own debt in perpetuity – all it would have to do would be to issue more debt, i.e., to ask the ECB to print more money.
This is a slight simplification, as the Spanish government would still have to meet certain fiscal criteria, such as continued austerity. But at the same time, if a central bank issues a guarantee to buy all bonds that its government issues in order to bring down the interest rate on those bonds, you cannot condition your promise on fiscal austerity. As soon as the government must take fiscal steps to maintain the central bank’s purchasing guarantee, the guarantee loses its inherent value. It is no longer worth any more than the bonds it is supposed to guarantee.
In other words, meaningless.
Assuming that the ECB does not make meaningless promises, the Spanish de facto default is all the more remarkable – and comes with serious warnings to everyone with money in Spain: get out or face a Cypriot Bank Heist seizure of your assets.
Here is what Jeremy Warner said in the Daily Telegraph a couple of days ago:
Next year, the [Spanish] deficit is expected to be 6.9 per cent [of GDP], the year after 6.6 per cent, and so on with very little further progress thereafter. Remember, all these projections are made on the basis of everything we know about policy so far, so they take account of the latest package of austerity measures announced by the Spanish Government.
Which means that we can expect an increase in the deficit ratio in the future, as forecasters often forget to incorporate the negative effects of austerity on GDP.
The situation looks even worse on a cyclically adjusted basis. What is sometimes called the “structural deficit”, or the bit of government borrowing that doesn’t go away even after the economy returns to growth (if indeed it ever does), actually deteriorates from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018.
This is important, because it shows that there is a structural change going on in the Spanish economy. People are paying permanently higher taxes and get permanently less back from government for that money. The private sector has been permanently diminished and an entire generation of young Spaniards has been sentenced to a life on welfare.
By 2018, Spain has far and away the worst structural deficit of any advanced economy, including other such well known fiscal basket cases as the UK and the US. So what happens when you carry on borrowing at that sort of rate, year in, year out? Your overall indebtedness rockets, of course, and that’s what’s going to happen to Spain, where general government gross debt is forecast to rise from 84.1 per cent of GDP last year to 110.6 per cent in 2018. No other advanced economy has such a dramatically worsening outlook.
But Greece did, and they ended up losing one quarter of the GDP.
Unfortunately, Jeremy Warner does not see the damage done by austerity:
And the tragedy of it all is that Spain is actually making relatively good progress in addressing the “primary balance”, that’s the deficit before debt servicing costs.
The “progress” consists of increasing taxes and reducing spending in an entirely static fashion. There is no analysis behind the austerity efforts of the long-term effects they will have on the economy. For example, the increase in the value-added tax that was enacted last year reduced the ability of consumers to spend on other items. This reduced private consumption and forced lay-offs in retail and other consumer-oriented industries. The laid off workers went from being taxpayers to being full-time entitlement consumers. As they did they reduced the tax base and cut tax revenues for the government in the future.
This point aside, Warner explains well the bankruptcy side of the issue:
What’s projected to occur is essentially what happens in all bankruptcies. Eventually you have to borrow more just to pay the interest on your existing debt. The fiscal compact requires eurozone countries to reduce their deficits to 3 per cent by the end of this year, though Spain among others was recently granted an extension. But on these numbers, there is no chance ever of achieving this target without further austerity measures … it seems doubtful an economy where unemployment is already above 25 per cent could take any more. … All this leads to the conclusion that a big Spanish debt restructuring is inevitable.
Debt restructuring, of course, being the same as bankruptcy. In a matter of speaking, Greece did a “bankruptcy light” when they unilaterally wrote down their debt. In the case of Spain it would probably mean a much bigger debt writedown than in Greece.
Back to Warner:
Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank’s “outright monetary transactions” programme. … But in the end, no amount of liquidity can cover up for an underlying problem with solvency. Europe said that Greece was the first and last such restructuring, but then there was Cyprus.
And toward the end Warner issues a fair warning about a repetition of the Cyprus Bank Heist:
Confiscation of deposits looks all too possible. I don’t advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it’s the only rational thing to do.
Spain is the fourth largest euro-area economy, with ten percent of the euro zone GDP. If we add Greece, Cyprus and an all-but-certain Portuguese de facto bankruptcy, we would now have 14 percent of the euro area economy declared practically insolvent. As Jeremy Warner so well explains, the point where this bankruptcy becomes a fact is one where the macroeconomy in a country is permanently unable to bear the burden of government.
This means that 14 percent of the euro-zone economy will be at a point where it is acutely unable to fund the welfare state.
What conclusions will Europe’s elected officials draw from that? It remains to be seen, though it is not far fetched to assume that no one will be ready, willing or courageous enough to remove the welfare state.
That is too bad, because it means – again – that Europe is stuck in a permanent state of industrial poverty. Hopefully, America’s elected officials will watch, learn and do the right thing.
This is a bit disturbing. As a direct result of EU-enforced austerity policies there are now signs of inflation in the troubled Spanish economy. From the Spanish issue of The Local:
You might have heard of the Big Mac Index which compares product prices around the world using the average cost of a McDonalds hamburger as its chief indicator. Now La Nueva España newspaper in Asturias has given this a Spanish twist: the Tortilla Index. The paper reported on Thursday that inflation is biting into the humble Spanish tortilla. Consumer price index figures show costs for the three main ingredients in the tortilla have gone up in the last 12 months. Potatoes are up a third on February last year, oil is 19 percent more expensive, and customers are having to fork out an extra 12 percent for eggs. The cost of living has gone up 2.8 percent in the last year, Spain’s national stats office the INE reported on Wednesday in its latest consumer price index report. Food prices have climbed 2.7 percent in the same period. Other items which have risen in price include electricity and gas — up over 7 percent in the last year — and medicines, up 12.9 percent in real terms according to the INE.
In September last year the Spanish parliament raised the tax rate in two of the nation’s three value-added tax brackets:
Super-reduced rate: will remain unchanged at 4%. This rate includes basic foodstuffs such as bread, eggs and milk; books and newspapers; medicines. Reduced rate: currently 8% will be raised to 10%. This is charged on transport, tourism, restaurants, water and foodstuffs (except alcoholic beverages). General rate: currently 18% will be increased to 21%. This group includes items not included in the previous two groups such as clothing, footwear, electronics and furniture.
Although there was no increase in the rate charged on food, the increase in the middle tier has direct implications for the cost of, e.g., groceries. Furthermore, since this is a value-added tax and not a straightforward sales tax there is always the risk that tax hikes further back in the product chain affect the price of a product even if the rate on that product has not been raised. This is not supposed to happen, but the value-added tax model is notorious for causing inflation as a result of tax hikes on inputs. In this case, the increase in the tax on transportation would cause an increase in prices of groceries, even though transporters pay their own value-added tax.
Back to the moneysaverspain.com story:
One of the biggest surprises [in the value-added tax hike] has been that various products and services have been moved from the current 8% rate to the new 21% rate – a 13% increase. This is the case of the following: dentists, hairdressers, beauty treatments, funeral services, gyms, cinema & theatre tickets, theme parks & zoos. It is doubtful that companies will be able to absorb such a large increase and therefore there are some areas where consumers can save before these increases come into force.
This is a sneaky, back door way of raising taxes. It is devious because it can fly under the radar as no rates are increased. Our American sales tax is not immune to this kind of manipulation, though a value-added system is less transparent.
Here is another reason why the targeted value-added tax hikes are igniting inflation:
Utilities companies will apply the new 21% rate on bills from 1 September even though consumption was during the previous 18% period – all the more reason for you to ensure you’re on the cheapest tariff given the rises already implemented this year. Also phone & internet use in August and billed in September will have the new rate applied. Water is billed either monthly, or every 2 or 3 months depending on where you live, hence some consumers will see the new tax rate applied on a 3-month bill!
All of these products are inputs in retail business. In an economy as bad as the Spanish, nobody, from the supermarkets down to the local grocery stores, can afford to absorb tax increases on power, water, telecommunications or transportation services. Therefore, we can safely expect that this price trend will sustain. This is not good, because it is conspiring with a disturbingly high rate of unemployment and practically zero GDP growth.
Theoretically, the anemic levels of demand in the economy should not allow the retail industry to raise prices the way they do. In practice, though, taxes such as the value-added tax work as a mark-up on costs and are therefore passed on more or less in their entirety to the consumer. This means that the mark-up on prices will prevail so long as the higher tax rates remain in place.
Higher inflation and high unemployment is a particularly bad recipe for a sustained recession. We know it as stagflation, and it can do a lot of harm to an economy once it sets roots there. The United States seems to have dodged a stagflation bullet in 2012, though the alert remains in place for 2013. Right now, though, it is time to pray that Europe does not get caught in this rather nasty macroeconomic quagmire.
It is beginning to dawn on the European political elite that their superstate project, their welfare state and their currency union are on a runaway train heading for disaster. Media is beginning to pick up on that as well. Here is a nice summary by Benjamin Fox at the EU Observer:
February 22 was a black Friday wherever you were in Europe. The morning brought the publication of dismal economic data to the effect that the eurozone will remain in recession in 2013.
Only a statistical illiterate would have thought otherwise.
Then, at 10pm Brussels time as the the markets closed, ratings agency Moody’s quietly issued a statement stripping the UK of its AAA credit rating. For those lulled into a false sense of security through a recent combination of relatively benign financial markets and the euro strengthening against sterling and the yen, it was a rude awakening.
That surge was due mainly to one thing: the commitment by the European Central Bank to print an infinite amount of euros to back its worst-rated treasury bonds. That commitment told global investors that “you can get seven percent return on Spanish treasury bonds and always get your investment back from us – come Hell or High Water!” Of course the euro is going to experience a temporary surge under such ridiculous, and totally unsustainable conditions.
EU Observer again:
Reading the European Commission’s Winter Forecast is a singularly dispiriting experience. The bald figures are that the eurozone is expected to remain in recession with a 0.3 percent contraction in 2013. The words “sluggish … weak … vulnerable … modest … fragile’” litter the 140 pages of charts and analysis.
Some examples of GDP growth numbers from the Forecast: Britain +0.9 percent in 2013; Austria +0.7 percent; Germany +0.5 percent; France +0.1 percent; Netherlands -0.6 percent; Italy -1.0 percent; Spain -1.4 percent; Portugal -1.9 percent; Greece -4.4 percent.
There are a couple of exceptions with slightly higher growth rates, primarily Sweden and Poland. Both economies are heavily dependent on exports and compete increasingly for the same low-paying manufacturing jobs. Due to a better working labor market and a more friendly tax environment my bet is Poland will eke out a victory in that competition, which would further depress the Swedish growth number.
That aside, there is a lot to be seriously worried about in the Commission’s Winter Forecast numbers. The overall standstill in GDP is very worrying, as 2013 represents the fifth year of a crisis that was originally relatively manageable but which has been made far worse by disastrous austerity measures. Since the Eurocracy – both political and administrative – remains committed to austerity, it is basically impossible to find any scenario that would allow Europe’s troubled economies to pull out of this endless recession.
I have warned about this before, and I recently drew the conclusion that Europe is in a state of permanent decline and that this permanent decline involves a drastic reduction in the standard of living for young Europeans – their prosperity is, so to speak, on hold. I also recently explained that Europe now represents what we could define as industrial poverty, that it is becoming an economic wasteland plagued by high unemployment, a static standard of living and overall lost opportunities for everyone except a small, political elite that – thus far – can live high on the hog in the Eurocratic ivory tower.
Perhaps I should take joy in the fact that my analysis has been spot on all the way. But that would be cynical, and I am not prone to either cynicism or schadenfreude. I am sincerely angered by what big government has done to Europe, and I fear that the only way out of this situation is a political Balkanization of the entire continent. That means a disorderly fragmentation, with outlier countries being ruled by fascists or stalinists (In Greece, both are about the same influential size in parliament) and panic forcing a return to national currencies under great financial and fiscal turmoil.
I would of course like to see Europe make an orderly retreat from the EU project, and I wholeheartedly support Euroskeptic heroes like Nigel Farage in fighting to secure that orderly retreat. However, as things look right now I predict that the economic crisis that is sweeping like a bonfire across Europe will burn down the better of the European economy before Mr. Farage and his fellow Euroskeptics gain enough momentum to put out that fire with free-market reforms and structural reductions to Europe’s enormous government.
Unfortunately, there is a lot to back up that last prediction. One example: the Greek economy is going to contract by another 4.4 percent in 2013. The Greek have already lost one quarter of their GDP since the crisis began in 2009. This is nothing short of economic free-fall, a recession that has escalated into full-scale depression, fueled by the destructive forces of austerity.
Back to Benjamin Fox in the EU Observer:
Spain’s budget deficit has cleared 10 percent. The average eurozone country now has a debt to GDP ratio of 95 percent – a figure that observers had previously thought was applicable only to Italy and Greece.
Those observers thought austerity would improve economic conditions in the countries where it is applied. It does not, it never has and it never will.
Mr. Fox then notes that the crisis is spreading beyond its “origin”, Greece:
While the Greek economy will contract by a further 4.4 percent this year – by the end of 2013 Greek economic output will have fallen by more than a quarter in five years – the clear indication from the Winter Forecast is that Athens is no longer in the eye of the storm. Paris and Madrid now have that unwanted place. France was one of a handful of countries called out for censure by commissioner Rehn on Friday. The French budget deficit remains stubbornly high, falling by a mere 0.6 percent to 4.6 percent in 2012. The commission’s projections have it remaining above the 3 percent threshold in 2013 and 2014. Ominously, Rehn told reporters that the commission would prepare a full report on France’s public spending after Paris prepares its next budget plan, adding that President Francois Hollande’s government needs to “pursue structural reforms alongside a consolidation programme.”
The Eurocrats may get away with destroying 25 percent of the Greek economy. But before they set out to do the same to France, they should consider the law of big numbers. France is the second largest euro-zone economy. If you destroy one quarter of that economy, you will accelerate the current European crisis from a looming depression into something that could even be more devastating than the Great Depression.
Mr. Rehn and his Eurocrat cohorts are not playing with fire. They are playing with a macroeconomic Hiroshima.
Benjamin Fox at the EU Observer does not quite seem to get the magnitude of the problems he is reporting, but that does not take away from his reporting them:
Some of the figures that leap off the pages of the Spanish assessment are truly alarming. Spain’s budget deficit actually increased to 10.2 percent in 2012, although the data does not include the savings from spending cuts and tax rises at national and regional level in the final weeks of the year, estimated to be worth 3.2 percent. Even then, the country will still have averaged a 10 percent deficit over the last four years. By the end of 2014, its debt pile will have nearly doubled to 101 percent of GDP over the space of five years.
Well, the good old Keynesian multiplier will tell you that if you contract government spending by 3.2 percent of GDP in that short of a time period, you can expect the private sector to contract by at least as much over the next 4-6 quarters. However, a recent IMF study showed that the multiplier works faster for reductions in government spending than for any type of increase in macroeconomic activity. Therefore, the negative repercussions of these Spanish austerity measures could begin to make themselves known in the Spanish economy already in the first quarter of this year.
Such a contraction in private-sector activity will erode the tax base and increase demand for tax-paid entitlements. As a result, the deficit will bounce back up again and probably exhibit a net increase.
In other words, what Mr. Fox sees as a mysterious persistence in deficits is really a logical consequence of the economic policies of the Spanish central and regional governments.
One of the many social disasters that will characterize the permanent European decline is very high, very costly unemployment. Mr. Fox notes this:
The headline rate of 11.7 percent unemployment across the eurozone is bad enough, but it is the sharp rise in long-term joblessness that is most concerning. Forty five percent of the EU’s unemployed have been out of work for more than a year, and in eight countries this figure rises to over one in two. In Spain, Greece and Portugal, where the unemployment rate is above 15 percent and youth unemployment sits close to one in two…
That’s 50 percent youth unemployment. Consider what that means for the loyalty of the young toward their country – and its political, economic and cultural leaders.
…millions of Europeans risk being locked out of the labour market for good. In the foreword to the Winter Forecast, Marco Buti, head of the commission’s economics department, rightly acknowledges the “grave social consequences” resulting from the unemployment crisis. But it is more dangerous than that. As the commission paper concedes “long-term unemployment is associated with lower employability of job seekers and a lower sensitivity of the labour market to economic upturns.” The longer people are out of work, the more likely it is that high unemployment rates become a structural feature of the European economy.
Not to mention their proneness to support extremist political parties. Support for Golden Dawn, the Greek Nazis, does not come solely from the police and the military.
I am sometimes asked what I think Europe can do about this crisis. I have tossed and turned that question around, and I am sad to say that my answer is very short: “very little”. That said, here are some desperate measures that could at least give Europe a chance:
1. Fiscal cease-fire. Stop with the austerity measures right now.
2. Labor-market deregulation. Most of Europe suffers from very rigid hire-and-fire laws. Give Europe’s employers a chance to take on new workers without having to make a de facto life-time commitment to them.
3. Flatten the tax structure. One of Europe’s most discouraging features is the steep marginal income taxes. Give job creators a chance to keep more of their money.
4. Orderly EU retreat. Let the Euroskeptics design a plan to dismantle the entire EU project and liberate the nation states – and, most important of all, their peoples – from this authoritarian, growth-stifling, freedom-eating bureauacracy.
5. Bye, bye to the welfare state. Europe needs a long-term plan – unique to each country – to get rid of its entitlement-based welfare state. Some ideas for America can perhaps be of inspiration for Europe as well.
These are, again, some very short points. I do not see fertile ground for either of them at this point, let alone for a more elaborate plan. However, there may still be hope to save individual countries, such as Britain, if right-minded political leaders can gain more influence.
But even if Britain and a couple of other countries escape the fury of the current crisis, the political, economic and social landscape of Europe will look very different in five years than it does today. And it won’t be for the better of Europe’s suffering masses.
Just as the Eurocrats thought they had managed to talk down the euro crisis and save their beloved currency union, a little Danish boy steps out of the crowd and points out that the emperor still has no clothes. From Bloomberg.com (via Zerohedge):
Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.
I spent six years in Denmark. Danes are serious professionals, they are upfront, free-spirited and they have no problem speaking the truth. Culturally, When you hear this from a man in this position within the private sector in Denmark, you better listen.
“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.”
Exactly. The main reason why the euro appears to be stable at this point is that the European Central Bank has put a cooler on the bonfire-like debt crisis by promising to buy any euro-denominated treasury bond, anywhere, any time. Technically, the promise was limited to the most troubled eurozone countries, but by implication it extends to all member states.
This uncapped promise has allowed international investors to go back into high-yield euro-denominated treasuries from primarily Greece, Portugal, Spain and Italy. Secondarily, they can also invest with similar confidence in French treasuries, which are next on the troubled-bonds list. Thereby the ECB removed a major reason for investor flight out of the euro, temporarily strengthened the currency and created the false impression that the crisis is over.
It is not. Bloomberg.com again, which paints a picture of declining GDP and a new phase in the debt crisis:
The European Central Bank forecasts the euro-area economy will shrink 0.3 percent this year … [and while] the euro has strengthened, the economies of Germany, France and Italy all shrank more than estimated in the fourth quarter. Ministers from the 17-member euro area met during the week to discuss aid to Cyprus and Greece as a tightening election contest in Italy and a political scandal in Spain threaten to reignite the region’s debt crisis.
Greece has suffered from a shrinking GDP for years now. Since the recession-turned-depression started they have lost roughly a quarter of their economy. That is extreme, but it shows the devastating consequences of combining austerity with an entirely artificial currency union. Furthermore, it should be a warning sign to the Eurocrats as well as other member states to not adopt the same kind of fiscal policy in their countries. Yet that is precisely what seems to be in the making: the “aid” to Cyprus and – again – to Greece will consist of a buyout of treasury bonds combined with austerity requirements.
There can be only one outcome: more of the same crisis.
As Bloomberg.com continues, it illustrates the dire situation of the European economy, a situation that according to Danish banker Christensen is going to be the undoing of the euro:
France is grappling with shrinking investment, job cuts by companies such as Renault SA and pressure from European partners to speed budget cuts. While Germany expanded 0.7 percent last year…
That’s a pathetic “growth” rate for an economy like the German.
…France posted no growth and Italy probably contracted more than 2 percent, the weakest in the euro area after Greece and Portugal, according to the European Commission. The economy is on the brink of its third recession in four years and the highest joblessness since 1998. Prime Minister Jean-Marc Ayrault said Feb. 13 the country won’t make its budget-deficit target of 3 percent of gross domestic product this year as the economy fails to generate growth and taxes.
The pursuit of a balanced budget is the enemy of growth. So long as the political leaders of Europe’s big welfare states do not want to concede that their countries can no longer afford their big, onerous, sloth-encouraging entitlement programs, there will be no change in the course of the European economy. The welfare states will continue to drive up deficits and drive down growth. The EU will continue to demand austerity, which will further drive down growth and widen the deficit gaps in government budgets. Europe will stagger and stumble, but there is no chance it will ever recover under its current big, redistributive goernment.
In a nutshell, all you Europeans: this is as good as it gets.
And just to add some more salt in Europe’s self-inflicted wounds, Bloomberg. com tops off with a stark reminder of the economic reality the Europe is stuck in:
“People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.” … Spain, which plans to sell three- and nine-month bills tomorrow and bonds maturing in 2015, 2019 and 2023 on Feb. 21, faces a sixth year of slump. Output is forecast to contract for a second year in 2013 with unemployment at 27 percent amid the deepest budget cuts in the nation’s democratic history. Public-sector debt is at record levels, having more than doubled from 40 percent of gross domestic product in 2008. The European Commission, which is due to update its forecasts this week, sees it rising to 97.1 percent of GDP next year.
This is the crisis that the ECB is trying to cover with an endless monetary commitment to defend the euro. But the deficits do not go away, and economic growth does not return. In its desperate fight to save the euro and the welfare state, Europe’s political leaders will bleed the former dry and deplete the latter of any money to honor its entitlement commitments.
I stand by my verdict: Europe is in permanent decline, it is turning itself into an economic wasteland of industrial poverty that over time will be left behind by North America and Asia.
As this blog has reported, the Spanish province of Catalonia is being driven into secession from Spain because of the central government’s harsh austerity policies. On Sunday, Catalan voters were given a chance to express their views on whether or not they would be better off on their own. Predictably, the EU Observer reports that the majority favored independence:
Separatist parties were the winners in Sunday’s (25 November) regional election in Catalonia, which saw the highest voter turnout ever in Spanish regional elections. The new parliament still favours a referendum on independence, something Madrid has said it will oppose. The governing centre-right alliance party Convergència i Unio (CiU) won 50 seats out of 135 in the Catalan parliament, followed by the left-wing separatist party Esquerra Republicana with 21 seats. In total, the seats in the new parliament that favour the “right to decide” on independence from Spain is nearly two-thirds with 87 while 48 are against – only a slight change from before the election (86 to 49).
The high voter turnout and reinforcement of a pro-independence majority are clear signs of where a referendum might end up. There is no doubt that the Catalonians believe they will be better off economically on their own.
Before we get there, though, let us make a brief note on the Catalonian relationship to the EU. Many people seem to believe that this is the key issue as far as independence goes. The EU Observer suggests that:
The potential road to independence is unlikely to be straightforward, however. Madrid is against a break-up and the Catalans themselves are cautious when it comes to a change in relations with the European Union. If Catalonia were to become independent, it may have to re-apply for EU membership – a long and cumbersome process.
Scotland is facing a similar problem. However, in their case as well as with Catalonia the formal relations to the EU are merely a superficial issue compared to the underlying economic situation. A month ago I observed that…
…attempts from Brussels to suppress this reactionary force could easily raise tensions even further: the advancement of nationalism in Greece and separatism in Spain are examples of how regular Europeans respond not to the democratic deficit in the EU – that has been around for two decades now without stirring conflicts – but to the ever tougher austerity policies that Europe’s leaders are shoving down the throats of more and more member states. Austerity bites harder than lack of representation. This does not mean that the democratic deficit is of no consequence. It is – in fact, the lack of working parliamentary democracy is precisely what has brought about Europe’s current crisis. But people have a tendency of not caring about how to influence, or not influence, government until government makes their lives miserable. That is happening with austerity.
Even if an independent Catalonia, or Scotland, would be able to negotiate a good membership deal with the EU (and thus surrender the independence they would just have been granted) they would still have to subject their economies to the same austerity policies that have done so much harm already. This is especially likely in the case of Catalonia where, in the case of independence, it is very likely that voters would want to preserve the same old welfare state that has brought Spain to its knees. Consider the following hint given by the EU Observer:
Catalan President Artur Mas will continue to lead the northeastern region in Spain, but his victory was a bitter one, as his party lost 12 seats compared to the election in 2010 when CiU came into power. Mas called for snap elections to give legitimacy to his plan for a Catalan referendum on independence from Spain. He had hoped his party would be elected as the clear leader for such a process. Although parties in favour of the “right to decide” on independence have been legitimised, the governing CiU failed to get the absolute majority (68) they had hoped for. Instead, Mas has paid for the severe cuts in public spending – especially in health and education – his government has made in the last two years.
It is unclear how the pro-independence movement plans to run a welfare state in a sovereign state of Catalonia without ending up in the austerity trap where Spain finds itself right now. If the left gets to decide, then Catalonia will be Greece before the ink on their new constitution is dry.
When the statists try to sell the welfare state they always claim that it will eradicate poverty. It is their primary moral selling point, the one that they hope will convince the good-hearted that their path to socialism is superior to a society built on freedom and capitalism. You don’t need to look very closely at the last half-century in America to see how utterly false this notion is, but if that does not help Europe offers abundant evidence to the disastrous consequences of the welfare state.
Spain is one of the countries in Europe that has been hit the hardest by the welfare-state crisis. Not only has the crisis turned middle-class Spaniards into food scavengers, but it has also provoked separatism in Spanish provinces that eventually threatens to rip the nation apart. Now Yahoo News reports on yet another disturbing trend – a rapidly escalating housing crisis:
Spain approved a two-year suspension of evictions Thursday for some needy homeowners unable to pay their mortgages, but activists said the government failed to address the larger issue of how those who give up their homes may still remain indebted, sometimes for the rest of their lives. Evictions have suddenly became one of the most sensitive topics in Spain’s financial drama, and government officials acted less than a week after a Spanish woman facing eviction killed herself by jumping from an apartment balcony. They are trying reverse or at least delay a trend that has seen more than 371,000 mortgage eviction orders issued since the financial crisis hit the country in 2008.
Right here you would get the impression that the banks, who issue mortgage loans, are the evil culprits in this. But the root cause of this crisis is actually comparable to the causes behind the American mortgage meltdown: a combination of poorly designed policy measures together with the ideologically charged idea that everyone has the right to own a home.
There is also a euro-zone component to this. By joining the currency union Spain removed the country-specific credit risks that previously were known as currency risks and reflected in market-determined exchange rates. As Spain joined the currency union its interest rates fell substantially, close to German levels; in a matter of speaking, the currency union made Germany a co-signer on loans issued in Spain.
Long story short: the Spanish real estate boom of the past decade was the result of a package of highly irresponsible, ideologically driven policy measures. The banks that handed out mortgage loans right and left (how would you like an almost interest-free 50-year mortgage?) only responded a market-distorting incentives structure created by the Spanish government.
We should keep this in mind as we return to the Yahoo News story:
The government, which is still preparing a broader overhaul of the country’s mortgage and property laws, said it hoped to shield those most in need by suspending mortgage payments for mortgage holders with annual income of €14,400 ($18,400) or less after taxes, or those with expired unemployment benefits.
How do you get a mortgage if you make $18,400 per year? Even in Spain, that is not a whole lot of money, especially if we take into account that the national income tax rate in Spain begins at 24 percent (24.75 percent after recent tax increases). Then you pay provincial taxes, local taxes, value added taxes on everything you buy…
The fact that banks issued mortgage loans to people with such small incomes is clear evidence of the social engineering that drove the Spanish credit legislation in the past decade.
Back to Yahoo News:
[The] government tacked on conditions for those wanting an eviction suspension. To qualify, they must have more than three children, or have children under the age of three, or be elderly, or have disabled people in the household, or be single parents with two children, or be victims of domestic violence. They can stay in their homes for two years without paying their mortgages, but it’s unclear what will happen after that if they have still been unable to find work in a country where unemployment stands at 25 percent and is expected to rise significantly next year.
As I reported in September, the high-and-rising unemployment levels across Europe are the result of continent-wide austerity policies. So long as Spain stays on its current austerity course, it is going to drive more people out of work, leading to more mortgage defaults – and a deepening social and economic crisis.
Who, for one, is going to pay the mortgages that hundreds of thousands of Spaniards can no longer pay? Part of the answer is: German taxpayers. The ballooning Spanish mortgage crisis has prompted the EU to intervene with a bank bailout program that involves concentrating all the bad bank assets to one single bank. The idea is that this bank then can sell off its assets at highly discounted prices and thus little by little let the steam out of the banking system.
The problem with this strategy is that it is not working. Private investors are very reluctant to investing in this project. Via Zerohedge we get the following story from El Confidencial, a Spanish news site (apologies for a rough Google translation):
The ‘bad bank’ that will manage real estate assets and real estate loans of nationalized entities not established on 1 December with private shareholders, date committed to the European aid program set out in the MOU. To overcome this delay, the Fund for Orderly Bank Restructuring (FROB) will create a society preparatory to meet deadlines and allow time for entering the shareholders, to the difficulties in attracting private investors before 30 November. According to the new schedule, the executive hopes to have the capital to absorb the assets of the group 1 (nationalized banks) on schedule on 31 December. … The ‘bad bank’ will not bring assets to fund social rent, which will draw on the homes that banks keep on their balance sheets and transferred to Sareb, ie those of less than 100,000 euros of net worth. Thus, the waiver FROB manage a fleet of social rental housing, as absorbant assets are called to be sold to investors in a period as short as possible, although it has a horizon of up to 15 years to not without having to sell profitable assets.
In other words, not only was the Spanish government caught lying (hardly notable these days), but just as we expected, over two weeks after the launch of “Sareb” – the latest deus ex which was supposed to offload the need to issue ever more sovereign debt to fund Spain’s nationalization of ever more insolvent sectors to private investors, said private investors have taken a long, hard look at the “deal” the Bad Bank offers them and have said “no bid.” Oh yes, and so much for “vehicle credibility.”
Which means that the Spanish government, backed by the Eurocrats in Brussels, will have to seek another taker of this bad debt. It is almost a tautology to say that this “other taker” will be the EU through one of its bailout initiatives – either for banks or for governments.
Those initiatives, in turn, are paid for by taxpayers in EU member states that are still functioning relatively well by current European standards. However, now that the Germans are beginning to feel the pinch of Europe’s massive austerity wave, it is becoming increasingly difficult to see who the Eurocrats and their peers in national governments are going to raid next time.
There is one question that no one seems to have an answer to: what will Europe’s governments do when they have run out of taxpayers – and still can’t honor all their spending commitments? What will they do when they have exhausted all options for paying for their uncontrollably large entitlement programs?
Perhaps they are too preoccupied to answer that question. Maybe they are too busy with another, even more serious question:
What will Europe’s welfare-state dependents do when their governments stop feeding them?
As the European economic crisis continues and even grows deeper, the EU responds with measures that are anything from irrelevant to entirely counter-productive. The austerity policies that the EU and the ECB are forcing upon troubled member states belong in the latter category, right out at the edge of political sanity. Almost as ridiculously self-defeating is the new EU bailout scheme for deficit-ridden state governments. Referred to as a “rescue fund”, this program is going to buy treasury bonds from governments in order to keep the interest rates down on the loans that those governments have to take to cover their deficits.
This rescue fund has not yet been activated, but that could very well happen soon. EurActiv has the story:
Spanish Prime Minister Mariano Rajoy kept financial markets guessing yesterday (29 October) over whether he will seek a credit line from the eurozone’s rescue fund but said he would do so “when I think it is in the interests of Spain”. … [Italian Prime Minister Mario] Monti said it was vital that the European Central Bank’s bond-buying programme to support troubled states be activated, a strong hint that Spain should take the plunge, since he also said Italy did not need a bailout. “It is of paramount importance that the instrument is put to work, that it does not remain theoretical,” Monti said. Monti said earlier this month that if Spain were to request a credit line from the eurozone’s rescue fund, triggering ECB intervention, it would calm financial markets. While Rajoy maintained his ambiguity, he omitted previous demands to know more details of the ECB’s bond-buying plan before making up his mind.
The “rescue fund” is self-defeating and counter-productive for two reasons. First, it pumps out newly printed euros – i.e., increases money supply – at a time when demand for money is very low. The short-term effect of this is a depreciation pressure on the euro: when the euro falls vs. other big currencies, import prices start rising. This creates an import-price driven inflation threat at a time when the economy is at the trough of a recession.
Long term, printing money creates a domestic inflation pressure. It is unlikely that this will happen throughout the euro zone, but if this bailout scheme – sorry, “rescue fund” – is going to continue to buy, e.g., Spanish treasury bonds in perpetuity, the effect will be similar to that which has brought about dangerous levels of inflation in countries like Argentina and Venezuela.
Which brings us to the second reason why the rescue fund idea is self-defeating. The fund essentially promises to feed government spending with expanding money supply. (It is extremely unlikely that the fund can sustain for any period of time if funded by tax revenues.) The practical meaning of this is that welfare states like Greece, Spain, Portugal and Italy can continue to dole out entitlements – work-free income – to large groups of their citizens. These entitlements are then used to pay for daily expenses, which of course keeps consumer demand at a reasonable level. But the flip side is that the more people are allowed to remain on entitlements, the fewer people will participate in the work force. As fewer participate in the work force, there will be less production to go around, which means less supply compared to demand – an inflation driver right there – and fewer taxpayers.
As the taxpaying population shrinks, whether in absolute or relative terms, the government’s need for more rescue-fund bailout cash persists and even increases. The EU digs itself into a hole of endless money supply expansion, and its only collateral will be treasury bonds that will be in such abundant supply that you would have to pay people to take them off your hands.
It is rather disturbing that the prime ministers of Italy and Spain can discuss the “rescue fund” so casually, without even hinting at any of the problems associated with it.
Perhaps they are blinded by the short-term effect on interest rates that this and similar schemes can have. EurActiv again:
Rome’s borrowing costs have fallen since July, partly due to the European Central Bank’s pledge to buy unlimited quantities of bonds if necessary to help states that request aid and accept strict conditions, but also on hopes that Monti may stay on after next year’s general election.
But, says the report, there are other factors at work that erode any gains from this reckless “rescue fund” commitment:
Italian and Spanish bond yields rose on Monday, partly due to uncertainty in the eurozone’s recession-stricken third and fourth largest economies. But Italy paid less than a month ago to sell €8 billion of six-month bill. The euro also slipped on doubts over whether Greece, the country that triggered Europe’s debt crisis, can agree to a deal on new austerity measures and its international lenders can figure out how to make its huge debts sustainable.
And that is precisely the question that no one wants to answer. The reason is simple: if Europe’s political leaders were to actually take a close look at the crisis they are struggling with, they would inevitably reach the conclusion that the cause is the welfare state and its conglomerate of over-promising, work-discouraging entitlement programs. That, however, would require a fundamental course correction in European politics, in the public policy debate and in how Europeans in general live their lives.
Nevertheless, the only way out for Europe is to structurally reform away its welfare state. Otherwise, the entire continent will be crushed under the pressure from, on the one hand, those who want to raise taxes to save the welfare state and, on the other hand, those who want to save the welfare state with austerity-driven spending cuts. Both strategies are destructive and entirely counter-productive: higher taxes depress private-sector activity and erode the tax base; spending cuts reduce government spending without cutting taxes, thus raising the government’s net burden on the private sector.
There is ample evidence around Europe of what austerity does to a country. In addition to the most obvious disaster, Greece, the Spanish crisis offers a disturbing but important case study. The national government is doing its very best to force austerity upon the regions, something that works well – from a strictly administrative viewpoint – in a centralized nation-state like Greece (or Sweden, which was put through the grinders of austerity in the ’90s). But Spain is not a traditional nation state: its provinces are autonomous to a point where the country more resembles a federation than anything else.
Because of their relative independence, the Spanish provinces are pushing back against the national austerity agenda. I discussed this problem in September. A more elaborate analysis is offered by Helena Spongenberg of the EU Observer:
The result of Sunday’s regional elections in northern Spain has given Madrid a bit of breathing space and support for the austerity measures needed to put the fifth largest economy in the European Union back on track. But it has also given the conservative government a bit of a headache when it comes to Spain’s continued unity.
In addition to the problems with keeping Catalonia from seceding, the national government has to deal with the two northern provinces of Galicia and the Basque Country. Both held regional elections on October 21, and as Spongenberg explains, partly as a result of the election outcomes the two regions respond quite differently to the austerity efforts:
The past year’s austerity measures taken by the current Spanish government – led by President Mariano Rajoy’s centre-right Partido Popular – got the thumbs up in Galicia. … [It] was feared that voters in Galicia would take their anger of Madrid’s severe budget cuts out at the polls, as it happened at the regional election in Andalusia in March when the Social Democrats defeated PP. The fears were unfounded and PP has even increased its absolute majority gaining 41 (previously 38) seats out of 75 in the Galician Parliament. … The election in the Basque Country, however, turned out as expected – or rather, as feared by the government in Madrid. Two out of three lawmakers in the Basque Parliament are now Basque nationalists – 48 seats out of 75. … The moderate nationalist party PNV was the overall winner with 27 seats, and is set to form a minority government in Vitoria … PNV backs further regional autonomy from Madrid, but [PNV leader] Urkullu also promised in the election rally to bring a new law on Basque independence to a referendum in 2015.
Spongenberg sees this as a temporary mandate for the national government to…
…go ahead with further austerity measures. But Rajoy can hardly relax for long. Spain is in its second recession since the crisis began in 2008; an economic bailout of the country is imminent; another general strike is set for November 14th; and the separatists in Catalonia are expected to win the elections on November 25th.
The question that Spanish voters should ask themselves is whether or not the welfare state is so dear to them that they are willing to risk the unity of their country to save it. That is, after all, the essence of what the national government is saying when it continues to impose austerity on the Spanish economy.
As I explained above, there is no alternative in relying on the “rescue fund” as an alternative to austerity. Not only does the “rescue fund” come with all the negative consequences outlined here, but the Spanish government will in all likelihood have to double down on its austerity policies in order to get any money. That would create a double-whammy for the Spanish economy: short-term destruction of growth and jobs, and long-term threats of inflation.
It is sad to see an entire continent commit macroeconomic suicide. It is even sadder when it is happening in the name of an ideology. But the saddest part of it all is that the alternative – structural reform to end the welfare state – could so easily be done, with excellent results for everyone, especially the poor, needy and unemployed.
For a first glimpse of how this can be done, from an American perspective, click here.
In ten years time, Europe will have become the South America of the 21st century. I am not saying this as a punch line, but as a serious, analytically backed prediction.
In the 1920s South America was a prosperous region, with Argentina being a bigger magnet for migrants from Europe than the United States. The prosperity period lasted for a few decades; in the ’60s there had been a shift away from free-market economics and limited government toward an increasingly elaborate welfare state. During the ’70s the continent suffered from ill-designed economic policies that were put in place to save the welfare states, but the end result was hyperinflation, increased social instability and withering prosperity.
The “solution” was military intervention. Military dictatorships took over in, e.g., Chile, with the explicit intent to stabilize the country and put the economy back on track again. But oppression can never compete with freedom, and the end result was a double loss for the people: what the welfare state took away in economic freedom, reprehensible dictatorships took away in individual freedom.
Nevertheless, it is important to remember that the decline of South America began long before Chilean president Salvador Allende was executed in Santiago in 1973. By the same token, Europe’s problems today have not materialized out of thin air. They are the result of a long series of bad policy choices. This is not an excuse for what the military did in South America, but it is part of an important explanation.
The same pattern that brought juntas to power in,e.g., Argentina, Brazil and Chile is now emerging in parts of Europe. Right before our very eyes, Greece is leading the way with the growing, hard-line Golden Dawn Nazi party.
As part of the process where democracies in Europe decline into totalitarianism, more and more relevant aspects of nation-state independence are being lost. In the case of South America, the loss of independence came in the form of destroyed currencies that led to IMF and World Bank intervention – or, as in the Chilean case, the intervention of an uninvited military power (the Soviet Union were deploying military personnel on Chilean ground through their Cuban proxies). In the case of Europe, the loss of national independence is driven by an ever more powerful, ever more authoritarian European Union.
There are already signs that the EU is becoming an intolerable burden on nation states. Not only do we see nationalist parties gaining ground all around the EU, but there is also an emerging threat to nation-state survival in the form of provincial separatism. This separatism is in direct response to the loss of democratic sovereignty at the nation-state level. As the EU Observe reports, this provincial revolt is a bit more serious than mainstream European media is willing to recognize:
Four Catalan MEPs have asked the European Commission to tell Spain it cannot use military force to stop Catalonia from splitting away. The deputies – centre-left MEP Maria Badia, Greens Ana Miranda and Raul Romeva i Rueda and Liberal Ramon Tremosa – wrote to EU justice commissioner Vivianne Reding on 22 October. The letter says: “We are writing to you to convey our deep concern over a series of threats of the use of military force against the Catalan population … In these circumstances, the European Union should intervene preventatively to guarantee that the resolution of the Catalan conflict be resolved in a peaceful, democratic manner.”
This conflict between the provincial government in Catalonia and the central Spanish government does not come as a surprise. I have discussed this situation earlier, with reference to the austerity policies that the Spanish government is imposing on its people, upon direct dictates from the EU.
It notes that politicians from the centre-right People’s Party of Prime Minister Mariano Rajoy have spoken of article 8 of Spain’s constitution, which says the army can be used to protect Spanish sovereignty. It adds the commission should: “Make a public statement insisting on the withdrawal from the public debate of any military threat or use of force as a way of resolving this political conflict.”
I have been following European politics ever since I was a candidate for the European Parliament in 1995. I have never heard of a similar request from a provincial government for help from Brussels. This is indeed a tense situation, and the reaction from the national Spanish government only adds to this image:
The letter met with ridicule in Madrid. Rosa Diez from the centrist Union, Progress and Democracy Party called it an “insult” to Spanish democracy. Opposition Socialist Party leader Alfredo Perez Rubalcaba said it “does not bear any relation to reality.” But for his part, Spanish centre-right MEP Alejo Vidal-Quadras told Spanish TV just two weeks ago: “They [the government] should be briefing a general of the Civil Guard … the government should think of intervening in the rebellious region if they persist.”
Guardia Civil is a paramilitary national police force, with equipment and training somewhere between the police and a regular army. It was used frequently against ETA, the Basque separatists who terrorized Spain in the ’80s with the goal of creating an independent Basque republic (presumably run as a dictatorship). Fortunately, the Basque conflict was resolved peacefully and both the Basque and the Catalan provinces enjoy more independence than other Spanish provinces.
This, however, is not enough when their government budgets are taking beating after beating to comply with EU austerity requests. It is increasingly likely that the Catalan people will get to vote on independence in 2014.
That year the Scottish will also vote on the same issue. This raises the stakes in the separatist issue, and it gives EU-skeptical parties and nationalist movements across Europe more reasons to question – and politically resist – further concentration of powers to the Eurocracy. At the same time, attempts from Brussels to suppress this reactionary force could easily raise tensions even further: the advancement of nationalism in Greece and separatism in Spain are examples of how regular Europeans respond not to the democratic deficit in the EU – that has been around for two decades now without stirring conflicts – but to the ever tougher austerity policies that Europe’s leaders are shoving down the throats of more and more member states.
Austerity bites harder than lack of representation. This does not mean that the democratic deficit is of no consequence. It is – in fact, the lack of working parliamentary democracy is precisely what has brought about Europe’s current crisis. But people have a tendency of not caring about how to influence, or not influence, government until government makes their lives miserable. That is happening with austerity.
When people want to respond to austerity, they discover the democratic deficit that is built in to the EU structure. Rather than banging their heads against the Eurocratic brick wall, they respond by supporting nationalist and separatist political movements.
It remains to be seen how far this reaction will go. We can hope that the Eurocrats will take notice and stop pushing for themselves to have more undemocratic power. But a more realistic assumption is that the opposite will happen: the EU leadership will push ahead with its new budgetary superpowers and euro-zone parallel budgeting mechanisms.
That will only raise tensions across the continent. And so long as tensions keep rising, Europe will be torn apart, not brought together. At some point, the tearing-apart will lead to conflicts of a kind that will remind us eerily of South America in the mid-20th century.
After yesterday’s stagflation warning for the United States, we are throwing ourselves right back into the European turmoil. Today we can report that the EU is putting its economic policy hypocrisy on full display. On the one hand the Eurocrats and their elected supporters in the European Parliament want countries like Greece and Spain to cut government spending, and do it harshly, regardless of the consequences; on the one hand they wring their hands over the possibility of even a tiny reduction in the EU budget.
In an article on the EU budget, the EU Observer notes that…
…one in two member states are either in recession or in economic stagnation with unemployment up in most, said employment Commissioner Laszlo Andor. His comments came on the heels of massive protests against austerity cuts throughout the week in Greece, Portugal, and Spain. The European Parliament hopes to turn around the bleak unemployment figures but says the member states’ proposed cuts in the EU 2013 budget contradict the June ‘growth compact’ agreement. MEPs are expected to reject the budget cuts and instead back the commission’s proposals in a Thursday vote in parliament’s budget committee.
So on the one hand the EU is forcing big cuts in government spending in several member states, claiming that it will somehow help those economies back to growth and full employment; on the other hand the EU is lamenting that spending cuts at the EU level are bad for the economy.
It will be interesting to see how this hypocrisy plays into the turbulence in Greece. As the news site Ekathimerini reports, the EU, together with the ECB and the IMF – referred to as “the troika” – are pushing Athens very hard to execute more austerity-driven spending cuts:
Government officials resumed tough talks with troika officials on Monday as a draft budget for next year, outlining 7.8 billion euros in spending cuts and savings, was submitted to Parliament. Troika chiefs emerged wordless from a two-hour meeting with Finance Minister Yannis Stournaras, who simply noted the officials had sought clarifications on a 13.5-billion-euro austerity package proposed by the coalition government. A subsequent meeting between Prime Minister Antonis Samaras and troika chiefs finished in just 35 minutes, prompting speculation that the negotiations had stalled, reports that sources close to Samaras rebuffed. … The fact that several sticking points remain in talks with the troika, including over the proposed suspension of 15,000 civil servants which the two junior partners in the coalition vehemently oppose, suggests that a deal within the next few days is unlikely, putting the whole process back.
So while the EU budget will continue to grow, the EU is forcing Greece into a slew of harsh spending cuts:
Kathimerini understands that the troika has queried the enforceability of some 2 billion euros in proposed measures — chiefly cuts to the health, defense and local authority funding. The cuts in the draft budget for 2013 include 3.8 billion euros to pensions, 1.1 billion to civil servants’ salaries, around 800 million to social welfare benefits and 1.2 billion euros to state spending on health, defense and local authority spending.
These cuts come on top of three years of spending cuts and tax increases. Another story from Ekathimerini explains what these cuts are doing to Greek society:
Fifteen people that were arrested in Athens’s central Aghios Panteleimonas district late on Sunday during clashes between self-styled anarchists and supporters of Greece’s neofascist Chrysi Avgi (Golden Dawn) party on Monday faced felony charges. Some of the defendants, believed to be self-styled anarchists, were also charged with disturbing the peace, causing bodily harm to a police officer, and causing grave bodily injuries to other persons. According to police, a group of about 50 anarchists rode through the neighborhood on motorbikes late on Sunday in a protest against the presence of Golden Dawn in the area, which triggered the clashes. Fifteen people were injured in the clashes — two of them were taken to the KAT trauma hospital in Maroussi. Police said that local residents also clashed with the anarchists and that one of them brandished a gun during the scuffles but did not use it. Police said the anarchists were intercepted by members of the motorcycle-riding Delta team, who have also testified as witnesses. The suspects, aged between 18 and 30 years old, had their faces covered and were wearing helmets at the time of arrest, police said.
Greece is, of course, not the only country plagued by austerity and social turmoil. As the Wall Street Journal reports, things are pretty darn bad in Spain as well:
The Spanish government said the effort to clean up an ailing banking system will widen its budget gap and increase its debt load. The admission comes as concerns mount over the country’s solvency, sending its borrowing costs soaring and pushing the government of Prime Minister Mariano Rajoy closer to requesting European Union aid to help it finance itself. The euro zone’s fourth-largest economy is grappling with the collapse of a decadelong housing boom that sent tax revenue plummeting, cratered domestic demand and saddled banks with billion of euros of bad debts.
Nonsense. The real estate collapse did not cause the budget deficit. The Spanish government has been spending hard for a very long time, and its economy has been plagued by very high unemployment rates for a good two decades. But it is very easy to blame private investors who find a way to make money under the pressure of a high-tax, entitlement-spending welfare state, because that way you don’t have to admit that the crisis was caused by that same welfare state.
The Wall Street Journal again:
In its 2013 budget plan presented to Parliament on Saturday, the government said that the bank aid will inflate its budget deficit to around 7.4% of gross domestic product this year, which is above the deficit target of 6.3% of GDP for 2012 it has committed to with the European Union. Spain said that if the effect of measures to help banks are excluded, it would meet its EU commitment.
Let’s note right now that the EU Constitution actually bans deficits above three percent of GDP. In other words, even if the banking sector was solvent, the Spanish government would be running a deficit more than twice the size of what the EU permits. That part of the deficit, which is 85 percent of the total deficit, is directly caused by the welfare state.
Meanwhile, the Spanish government again raised its estimate of last year’s budget deficit to 9.44% of GDP from the previously reported 8.96% of GDP, to take into account measures to help its banks. It is the second time the government restated the 2011 budget deficit.
These are made because earlier forecasts and estimates have understated the negative effects of the austerity policies on GDP. A common mistake among non-Keynesian economists.
The budget revisions come as Mr. Rajoy faces mounting social and political backlash against his austerity and economic-reform measures. On Saturday, thousands of demonstrators descended on the national Parliament in Madrid for the third time in the past week to protest against spending cuts and tax increases. … Spain’s austerity budget for 2013 includes tax increases and spending cuts worth €13 billion by the central government. Including previously announced measures and cuts to be implemented by regional and municipal governments, Spain aims to slash its budget deficit by €37 billion next year. Even so, many analysts believe a deep economic recession will make it difficult for Spain to meet its EU commitments to reduce the deficit to 4.5% of GDP in 2013 and to 2.8% in 2014.
Which means we can expect more austerity, more declines in GDP, more unemployment – and more social turmoil.
How long can this vicious, downward spiral continue before someone stands up and says “there has got to be another way”?
There is not a day without disturbing news out of Europe. Here is the latest package, starting with a Reuters report from Spain:
Violent protests in Madrid and growing talk of secession in Catalonia are piling pressure on Spanish Prime Minister Mariano Rajoy as he moves closer to asking Europe for rescue money.
Before we move further into the story, let’s just note that the secession talks in Catalonia are real. If Catalonia breaks out of Spain it would bring with it the strongest economic region in the country. The only thing that could stop a secession is that Catalonia would have to apply for EU membership separately, or choose to stay independent from the EU as well. On the other hand, given the trajectory that the entire EU project is on, the Catalonians might actually secession from Spain as well as the EU to be a blessing.
Back to Reuters and the growing social tensions, caused by endless austerity:
With protesters stepping up anti-austerity demonstrations, Rajoy presents painful economic reforms and a tough 2013 budget on Thursday, aiming to persuade euro zone partners and investors that Spain is doing its deficit-cutting homework despite a recession and 25 percent unemployment. Figures released on Tuesday suggested Spain will miss its public deficit target of 6.3 percent of gross domestic product this year, and on Wednesday the central bank said the economy continued to contract sharply in the third quarter.
Countries hit hard by austerity do suffer from weaker GDP numbers. With weaker GDP comes higher unemployment, weaker tax revenues for the welfare state and thus perennial deficits. But as is evident from the Reuters story, these basic macroeconomic facts are as alien to Eurocrats and Spanish politicians as penguins are to Mars. That lack of understanding extends to the devastating consequences of austerity:
By pre-empting reforms demanded by Brussels — such as creating an independent fiscal auditor — Rajoy hopes to sell them to voters as home-grown rather than imposed from outside. Diplomats reported intense last-minute pressure on Madrid on Wednesday from key euro zone policymakers to take tougher measures, notably on freezing pensions. … Spain’s crisis has aggravated tensions between the central government and its self-governing regions. Catalonia needs a 5 billion euros bailout from the central state to meet debt payments this year, but Catalans are convinced they bear an unfairly large share of the country’s tax burden. More than half say they want independence from Spain, the highest level ever. Artur Mas, the conservative president of Catalonia, … [says] Catalonia should … hold a referendum on independence, which the central government says would be unconstitutional. Although an independent Catalonia is a remote possibility, the political instability sends a worrying message to investors.
Spain is ripe for another credit downgrade, which would take it right into junk bond territory. This, together with the mounting political and social instability and an economy on the verge of a free fall, means that Spain now qualifies as Greece 2.
This impression is reinforced by a report from CNBC:
On a recent evening, a hip-looking young woman was sorting through a stack of crates outside a fruit and vegetable store here in the working-class neighborhood of Vallecas as it shut down for the night. At first glance, she looked as if she might be a store employee. But no. The young woman was looking through the day’s trash for her next meal. Already, she had found a dozen aging potatoes she deemed edible and loaded them onto a luggage cart parked nearby. “When you don’t have enough money,” she said, declining to give her name, “this is what there is.” The woman, 33, said that she had once worked at the post office but that her unemployment benefits had run out and she was living now on 400 euros a month, about $520.
This is in the midst of one of Europe’s most generous welfare states. According to Eurostat data, the spending on welfare programs increased in Spain from 19.5 percent of GDP in 2001 to 25 percent in 2009. Of course, welfare programs often replace work-based income, meaning people can live without working. To others, welfare programs supplement a paycheck, allowing them to work less. The net effect is a reduction in labor supply and thereby a reduction in tax revenues.
To which the government responds with austerity. Austerity cuts welfare programs, including unemployment benefits, without relenting on the tax side. The economy remains depressed by government, only at a poorer level.
She was squatting with some friends in a building that still had water and electricity, while collecting “a little of everything” from the garbage after stores closed and the streets were dark and quiet. Such survival tactics are becoming increasingly commonplace here, with an unemployment rate over 50 percent among young people and more and more households having adults without jobs. So pervasive is the problem of scavenging that one Spanish city has resorted to installing locks on supermarket trash bins as a public health precaution. A report this year by a Catholic charity, Caritas, said that it had fed nearly one million hungry Spaniards in 2010, more than twice as many as in 2007. That number rose again in 2011 by 65,000.
The immediate cause of this social and economic disaster is austerity:
As Spain tries desperately to meet its budget targets, it has been forced to embark on the same path as Greece, introducing one austerity measure after another, cutting jobs, salaries, pensions and benefits, even as the economy continues to shrink. Most recently, the government raised the value-added tax three percentage points, to 21 percent, on most goods, and two percentage points on many food items, making life just that much harder for those on the edge.
And it is only going to get worse:
Little relief is in sight as the country’s regional governments, facing their own budget crisis, are chipping away at a range of previously free services, including school lunches for low-income families. For a growing number, the food in garbage bins helps make ends meet. At the huge wholesale fruit and vegetable market on the outskirts of this city recently, workers bustled, loading crates onto trucks. But in virtually every bay, there were men and women furtively collecting items that had rolled into the gutter. “It’s against the dignity of these people to have to look for food in this manner,” said Eduardo Berloso, an official in Girona, the city that padlocked its supermarket trash bins.
This is the face of industrial poverty, a phenomenon that the Greeks are painfully acquainted with. So acquainted are they, in fact, that their country is once again experiencing a political eruption. My Fox New York reports:
Europe’s fragile financial calm was shattered Wednesday as investors worried that violent anti-austerity protests in Greece and Spain’s debt troubles showed that the region still cannot get a grip on its financial crisis and stabilize its common currency, the euro. Police fired tear gas at rioters hurling gasoline bombs and chunks of marble Wednesday during Greece’s largest anti-austerity demonstration in six months — part of a 24-hour general strike that was a test for the nearly four-month old coalition government and the new spending cuts it plans to push through. The brief but intense clashes by a couple of hundred rioters participating in the demonstration of more than 60,000 people came a day after anti-austerity protests rocked the Spanish capital, Madrid. … Wednesday’s strike shut down Greece’s famed Acropolis and halted flights for hours. Ferry services were suspended, schools, shops and gas stations were closed and hospitals functioned on emergency staff. While the demonstration began peacefully, a couple of hundred protesters broke away to smash paving stones and marble facades to use as missiles against riot police, leading to clashes that petered out after about an hour. Eight policemen were injured, including one hit by a gasoline bomb, and 21 people were arrested, police said. At least two demonstrators were also injured. Government spokesman Simos Kedikoglou said the limited violence and what he called a smaller turnout than opposition parties had hoped for showed that “Greek society understands what the government is doing is the only possible solution.”
We have also seen these kinds of protests in Portugal.
So, what is the European political elite going to do about this? Well, not the right thing obviously, which would be to structurally reform away the root cause of the entire crisis – the welfare state. Instead, they are doubling down on austerity and determined to fight to the bitter end to try and force austerity down the throats of their taxpayers. As the British newspaper Independent reports, this arrogant attitude toward the proper role of government is not exclusive to the Eurocrats in Brussels, but includes EU member state leaders as well:
Angela Merkel issued a blunt warning to Germany’s ailing eurozone neighbours yesterday, telling them that pressing ahead with painful reforms and tough budget policies was the only way of resolving Europe’s intractable and deepening economic crisis. The Chancellor made her remarks in a speech to the Federation of German Industries on another day of turmoil in the currency bloc. The Spanish government faced mass anti-austerity protests in Madrid, while Greece was reported to be billions of euro off-track in meeting the terms of its bailout.
If blood letting does not cure the patient, then tap him for another pint or two. Surely that should make him better.
The serious question is of course how long the EU can keep up its ongoing destruction of prosperity in the name of keeping the euro zone together. The immediate outlook is not exactly in their favor:
Meanwhile, the ratings agency Standard and Poor’s once again highlighted the grim state of the EU economy, forecasting that the eurozone would not return to growth until at least 2014. Against such a gloomy backdrop, Ms Merkel insisted: “We need to take a deep breath to overcome this crisis. We must make the efforts that will allow Europe to emerge from the crisis stronger than it went in.”
And the best way to do that, according to her, is to continue to cut government spending, raise taxes, lock the garbage bins to keep people from scavenging for food and send the police after them when they voice their desperation in the streets.
Yep. A perfect plan. What could possibly go wrong here?