More Pain, But No Gain in Store.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
No matter how fast Spain’s economy grows, its government cannot seem to get a grip on its spending habits. This year is going to be the eighth consecutive year that Spain has overshot its fiscal target. Originally, the Spanish government was supposed to get its deficit back below the EU’s sacred limit of 3% of GDP by 2013, from a staggering 11% in 2011. When it became clear during the darkest days of the crisis that it would be impossible, the deadline was extended by a year. A year later, Madrid had made so little progress that it got a further two-year extension, to 2016.
Now, things are so serious that the EU is threatening to sanction Spain, as well as Portugal, up to 0.2% of GDP for failing to bring their deficit under the targets set by the Commission. It will be the first time that the EU has adopted such punitive measures, but for the biggest repeat offender of excess deficits, France, there is no punishment. Quelle surprise!
Spain, by contrast, could end up facing a fine of as much as €2 billion. All will depend on how much and how convincingly the Spanish government commits to reduce its deficit next year. Naturally, the fine will not be paid by the politicians who failed to play by the rules agreed upon in Brussels; it will be paid by the citizenry who are already suffering the consequences of the recession that helped cause the deficits.
The Rajoy government purposefully loosened the belt last year in a blatant effort to curry favor with voters ahead of the elections, during which time the Commission’s fiscal hawks were conspicuously silent. In fact, Brussels decided to postpone negative opinion on the Spanish budget for 2016 – a budget that had been drawn up with one basic goal in mind: to buy off as many gullible voters as it takes to tilt the electoral balance in the Rajoy government’s favor.
Austerity was suspended, spending was hiked, public sector jobs suddenly grew in number, and tax cuts were brought forward. Yet when Europe’s Economic and Taxation Affairs Commissioner Pierre Moscovici told the press that Madrid was at “risk of non-compliance” with the Stability and Growth Pact – not only for 2016 but for 2015 as well — he was quickly silenced by both the European Commission and Germany’s Finance Minister Wolfgang Schaeuble.
Political expedience trumped economic prudence. The Commission’s goal was clear: to get Rajoy, a man who can usually be trusted to do “whatever it takes,” reelected. It didn’t work.
As we warned well over a year ago, the long-term legacy of seven years of crippling fauxterity — when taxes go up, and public spending cuts hit lower and middle classes disproportionately, but the public debt nonetheless continues to rise (primarily due to the government’s ever-expanding bank-welfare programs) — together with four years of Rajoy’s unique brand of corrupt, strong-arm governance, would be to render Spain virtually ungovernable.
Now, the Troika has a problem: how to get Spain to adopt (and embrace) yet more fiscal pain, if the new government, assuming there is one, will be the weakest in Spain’s post-Franco history. For Spain’s other major party, the socialist PSOE, supporting a bill that would impose even greater economic suffering on the majority of the population while doing nothing to address the waste, excess, and corruption of the political system would be electoral suicide, as well as a gift to the anti-austerity Podemos party.
Spain has already committed to raise €6 billion in new funds this year from changes to the corporate tax regime. For next year it has pledged to pass a budget that will shrink its deficit from 5.1% of GDP to 3%. If the government actually delivers on this promise — a very sizable “IF” given its performance over the last four years — it will mean roughly €20 billion of savings in a country that is still coming to terms with the brutal, lasting effects of a four-year recession.
In 2008, Spain’s per-capita GDP — an indicator of economic activity per individual, and a close approximation of how individuals experience the economy — was €24,300. By 2015, it had dropped 4.2% to €23,300. During the same period, per-capita GDP of the 28 member EU rose 10.3% from €26,000 to €28,700. In other words, per-capita GDP in Spain went from being 6.5% below the EU average to being nearly 19% below the EU average.
And average household wealth in Spain has plummeted to levels not seen since the mid-1990s.
Granted, the 2008 figure was hiked by a real estate bubble that then imploded in the most spectacular fashion, but when it did, the pain was borne almost exclusively by the lower and middle classes — and in particular the young!
Spain’s unemployment fiasco improved somewhat in the last two years, but that’s largely a result of the “biggest migration” in the country’s history, in the words of the Bank of Spain. The number of employed (as opposed to unemployed), at 56% of the working age population, is 7.6 percentage points what it was in 2008. The last time it was that low was in 1975, the year Franco died.
The result has been an explosion in poverty. According to a recent study by Eurostat, Spain boasts one of the highest risk-of-poverty rates in the EU: in 2013 and 2014, it was behind only Greece, Cyprus, and Latvia (chart). Much of the pain has been borne by people aged between 25-54 — i.e. the working age population — whose risk of falling into poverty and exclusion rose to 32%. By contrast, for those over 55, the risk had declined from 28% in 2006 to 19% in 2014.
It’s no coincidence that people over the age of 65 represented almost 40% of voters for Rajoy’s People’s Party (PP), which during the last electoral campaign promised it would not touch the people’s pensions. What the PP didn’t mention is that it has quietly tapped the country’s richest piggy bank, the Social Security Reserve Fund, over the last four years to slow down the rise of Spain’s public debt.
The fund has been depleted from a peak of €66 billion in 2011 to €25 billion at last count and, according to El Pais, is expected to run out completely by the end of 2017, at which point the government — if there is one — will either have to slash pensions, causing significant pain to its biggest voters, or raise even more taxes on workers, to plug the gaping social security deficit, expected to be around €11 billion in 2016 alone.
The one thing that’s crystal clear is that the way things currently stand, Spain’s new generation of unemployed, underemployed, badly paid, or “ni-nis” (stay-at-home-kids) are going to struggle to maintain Spain’s burgeoning ranks of retirees. By Don Quijones, Raging Bull-Shit.
Spanish banks are in a category of their own. Read… Spain’s Banks are Suddenly “Too Broke To Fine”