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.
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.
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.
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.
Economics are manipulated to enrich certain elite players.ReplyDelete
Errors in paragraphs 2&6ReplyDelete
The figures are scary - if the Greek bailout is hurting prudent German investors so much, Spain will break the bank and the camel's back!ReplyDelete
Indeed it will, Joe.Delete
Keynesians to a man - and not one ever ran a business. They're all rentiers who enrich themselves by skimming a percentage of the vast wealth looted from taxpayers used to bribe the civil service, NGO, and union gangs who get them elected, or from directorships and 'consultation' fees from companies seeking licenses, permits, and government contracts.ReplyDelete
Their "business" is the systematic, parasitic exploitation of real business, which has become a global infestation. I wonder if they will be smart enough to jump off?
When they are suitably feather-bedded, accounts in the Cayman Islands, Swiss banks and what have you. No, they are not smart enough to be corrupt!Delete
Ironicly most people at my work are talking about overseas holidays in Greece Spain or Ireland since the euro is sooooo cheap.ReplyDelete
Sadly, the advertising to travel to these country was really reflecting how sad their economy had been
The thing is, James, the exchange rate is quite high, which does not really reflect the value of the economies in question. If Greece still had the drachma and Spain the peseta the currency would be able to find its own level, making these places far more attractive than they are.Delete
Which misses the point.ReplyDelete
The point being fiscal union, followed by political union.
There would still be a certain amount of individuality amongst countries, but most decisions on taxation would be taken eu-centrally.
Since tax evasion is seen as a national sport in Italy, Spain and Greece I feel that even fiscal union will not be enough.
Greece is EMU history, if Spain is as well then the entire Union may as well fold-up. Since the bill for Spain may well reach one trillion euros we are certainly approaching an event that would cripple not only Europe but most of the world. Since private debt in this country is fast approaching the trillion pound mark we may, ironically, be worse off than either Spain or Greece. Read your mortgage agreement, until paid-off the lender owns it ( or at least the debt).
Yes, John, the dismal science and the dismal Union leaves us all, well, dismal.Delete
good posting about Beyond the Economics of the MadhouseReplyDelete