By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After just over three and a half years of “radical” market reforms Spain is now a lean, fit economic machine – according to the Financial Times.
Despite a few minor blemishes, such as a 22% official unemployment rate and 50% youth unemployment, the Spanish Premier Mariano Rajoy’s economic record is not only laudable, it’s one that the governments of other crisis-hit economies should follow:
The Rajoy government’s courageous economic reforms, helped by ECB action, have allowed Spain to defy the once widespread prediction that it would remain Europe’s economic laggard. Its turnaround is a lesson — and not just for Greece — that remaining in the Eurozone does not condemn a nation to economic failure.
The FT is not alone in this assessment. At yesterday’s joint press conference with Rajoy at the German chancellery, Angela Merkel said that even Germany, Europe’s industrial powerhouse and financial sugar daddy, had a thing or two to learn from the example set by Spain. Unsurprisingly, Merkel failed to go into any detail, but she did give Rajoy a ringing endorsement:
Spain’s path is moving forward, upward and many people will take that into account come election time.
Politics as Usual
As is the case with just about everything connected to Europe’s slowly unraveling economy, Merkel’s intervention, like the FT’s, was wholly politically motivated – something Merkel as good as acknowledged when she stated that Germany has a keen interest in ensuring that Spain’s “economic progress” continues.
Given that recent opinion polls suggest that no single party will gain sufficient votes in December’s elections to govern Spain single-handedly, as Rajoy’s People’s Party has done with ruthless efficiency for the last three and a half years, the German chancellor could end up being disappointed. The two most likely outcomes of December’s general elections are a weak coalition government, at best, or no government at all, precisely at a time when the country’s most important economic region, Catalonia, is seriously considering cutting itself adrift [read… A Hot September for Catalonia].
Hence Europe’s rising fear of upheaval in Spain, the Eurozone’s fourth largest economy. It is this fear that has the likes of Merkel and the FT bending over backwards in praise of an economic miracle that, as even the FT admits, is making scant difference to the lives of many Spaniards – hardly a surprise given that the country’s unemployment rate (22%) is more indicative of a 1930s style economic depression than a sustained period of economic recovery.
Even by the government’s official statistics, Spain’s anemic jobs growth is already showing signs of stagnation. During the month of August the number of unemployed rose by 21,679 people, suggesting, as the Spanish bank BBVA warns, that Rajoy’s so-called recovery is already slowing.
Even those fortunate enough to have landed a job are in most cases earning a fraction of what they earned before the crisis. The vast majority of the new jobs are part-time — some lasting only a few days — and they pay poorly, doing little to improve the lives of the millions of Spaniards who lost their jobs during the global economic crisis.
However, jobs – or the lack thereof – are just a small part of the story; an even bigger issue is the price and sustainability of recovery.
The High Price of Recovery
At the beginning of Spain’s financial crisis, total private (non-financial sector) debt was more than €2 trillion, equivalent to a staggering 220% of GDP. At the same time, total public debt (including all the sort of things that Eurostats prefers to ignore, such as government guarantees, the liabilities of public companies and public sector delinquencies) amounted to €600 billion, roughly 60% of GDP, one of the lowest levels in Europe.
With the help of creative government accounting and the limitless generosity of unconsulted taxpayers, the tables have been turned: private debt has shrunk to €1.6 trillion (roughly 163% of GDP) while public debt has exploded by €900 billion to €1.49 trillion – an increase of almost 150% in six-and-a-half years, the lion’s share of which occurred under Rajoy’s watch. Naturally, a large part of that debt was used to settle accounts with German, French and British banks.
Worse still, despite the hundreds of billions of euros of future taxpayer funds plowed into recapitalizing the private sector – according to the FT, one of the Rajoy administration’s major successes – the amount of bad debt in the system continues to grow and Spain’s bad bank, Sareb, is hemorrhaging funds. If it runs out of capital, it may not be able to keep servicing its huge debt of €45 billion at last count. It just so happens that the guarantor on that debt is … the Spanish state.
Not done with driving Spain’s public debt to heretofore unimaginable levels, Rajoy’s government has also pulled off the biggest heist of public-sector pension funds in Spanish history. Since entering office just three-and-a-half years ago, it has pilfered €37 billion – roughly half of the total funds – from Spain’s public pension pot. El Economista warns, if the government were to continue draining the funds at the present, fast-accelerating rate, by 2018 the reserves would be stone-dry.
None of this qualifies as sound, sustainable economic management. On the bright side, however, the money was at least well-spent – namely on fine-tuning the government’s accounts to give the appearance that the economy is fully on the mend, which in turn allows Germany and the EU institutions to pretend that the European project is going just fine.
And that is ultimately what successful macroeconomic management is all about in Europe today: pretending that everything’s hunky dory while concealing or manipulating all the evidence that proves otherwise and doing absolutely nothing to address the real problems, such as, say, trimming Spain’s criminally bloated political fat. By Don Quijones, Raging Bull-Shit.
And in Catalonia, things are coming to a head. Read… A Hot September for Catalonia