Beyond the Economics of the Madhouse

Both the Economist and the Spectator this week have discovered a banal but obvious truth: that there is pain in Spain, yea, even so far as the word itself.  It’s not true, though, that the pain in Spain falls mainly in the plain; the pain falls everywhere, mountain and plain alike.  The pain is the euro. 

The euro crisis is a rolling comedy of false hopes and deeper errors.  And I’ll tell you this much – you ain’t heard nothin’ yet.  Writing in the Spectator, Daniel Hannan, one of my favourite observers on the European farce, rightly points out that that the troubled economies of Greece, Ireland, Portugal and Cyprus amount together to less than 5% of the Community’s economy.  Greece, in other words, was a sideshow. 

Spain is different; Spain is the main act.  Here the banks are massively exposed.  Not only would a crash swamp the whole of the European economy but a rescue package would drink deep, ‘twoud drink the cup and all.  Drawing again on my Shakespearean well, it may be the point where German taxpayers cry hold, enough! 

There is a form of madness here that I find almost impossible to comprehend. Economics and finance, I freely and wholeheartedly confess, are well beyond my comfort zone.  But at least I can understand the basics, which is more than Spanish politicians seem able to do.  Here is a truth I cannot make any simpler: Spain’s present economic woes are all down to the euro. 

Before the great crash of 2008 the country was running a surplus.  The national debt had been reduced to 42% of Gross Domestic Product.  This is where the real lunacy comes.  With the economy beginning to overheat one sure way of taking the pressure off is by raising interest rates.  But the Spanish could not do that because they were locked into the asylum of the euro.  Spanish governments thus had to apply the interest rates set by the European Central Bank (ECB), low even for the north, catastrophic for the south. 

Again as Hannan points out, in the decade prior to 2008 Spain actually manage to run a negative interest rate.   There it was - money for the taking, and how it was taken.  If you have been to Spain recently you can’t possibly have missed the results, a property crash that makes Ireland’s look like a picnic, unsold, half-completed developments everywhere, waste on a massive scale.  The banks did well, though, hugely over fulfilling their bad debts quota. 

So Spain is drowning because of cheap credit.  What’s the solution according to the gnomes of Brussels?  Why, more cheap credit. Mariano Rayoy, the country’s prime minister, was given a £100million loan to prop up the country’s troubled banks, a great ‘triumph' by his insane lights.  It was a ‘triumph’ alright for every household in Spain, which found they were now carrying an extra debt burden of £15000.  There has to be another solution.  Yes there is – another bailout.  The petrol dump is on fire.  Hurry; pour in more petrol. 

Now do you really want to see something scary?  Well, it’s this.  The Spanish government has to borrow at 7% to prop up banks that can borrow from the ECB at 1%, so they can lend the money back to the Spanish government at 7% so it can bail them out.  Confused?  Yes, I am too.  The expressions vicious circle and downward spiral might have been invented to explain such a crazy scenario. 

For Spain, though its politicians are blind to the truth, Europe is the problem, not the solution.  The prognosis, as the Economist reports, is bleak.  The economy is in serious recession, the public sector is cutting spending and the private sector is reluctant to invest.  Unemployment is among the highest in the Continent, with one person in every four out of work.  High unemployment, falling demand and low investment impacts on tax receipts, which in turn impacts on Spain’s ability to meet its debt repayment targets.  Weak banks, more bailouts, more and more austerity; down and down the spiral goes.  Wilkins Micawber would understand: the result is indeed misery. 

Then this really is the economics of the madhouse?  No, it’s far too insane for that.