Sex, Drugs and Dodgy Accounting: Spain’s New Growth Strategy

By Don QuijonesRaging Bull-Shit .

Spain’s miraculous economic recovery is a mirage, a collective delusion concocted in the fevered but highly imaginative minds of government ministers, economists and accountants, and then projected on to the mass consciousness as official reality.

When it comes to creative accounting, few can hold a candle to the country’s finance minister Cristobal Montoro, who this week unveiled his latest scam scheme to “grow” the economy: namely to include prostitution and illegal drugs as part of its gross domestic product. This new accounting gimmick will add 20 billion fresh new euros to the country’s GDP — equivalent to a two percent boost. It will also automatically lower the ratio of public debt to GDP as well as the budget deficit, thus making it possible for Spain to “meet” the Troika’s deficit target of 6.5 percent.

The reason why this is necessary is that, despite brutal cost cutting, tax hikes and other forms of financial repression, the government has failed to stem the tide of debt expansion. The country’s public debt has more than doubled from a low of 42 percent of GDP six years ago to over 100 percent today. Meanwhile, the budget deficit continues to hover around 7 percent – almost double the maximum level mandated by Brussels.

Spain is not the only EU country to have had trouble keeping its deficit in check. As BusinessWeek reports, there are currently 17 member countries being monitored under what the EU calls “excessive deficit procedures.” Nor is Spain the only EU country to have resorted to including revenues from the sex and drugs trade to bump up its GDP. Italy was the first, followed soon after by the UK, and in September this year all EU Member States will be required by law to “calculate” and include criminal proceeds in their quarterly GDP figures.

Criminal Accounting

Some countries, such as Germany, Hungary, Austria, and Greece, already include revenues from legalized prostitution in their figures. This is also true for sales of drugs in countries such as the Netherlands, which combines revenues from decriminalized drugs such as marijuana with estimates on revenues from hard drugs such as heroin.

The difference between the Netherlands and Spain or the U.K., however, is that in the Netherlands both prostitution and an important part of the drugs trade, most notably marijuana, are not only legal but are tightly regulated. This means that the country’s government receives tax revenues from the activities and can at least assess the total financial value the markets generate with something approaching accuracy. By contrast, in Spain and the U.K. recreational drugs remain illegal. In fact, in Spain, a country with a long tradition of having some of the most relaxed drug legislation in the world, Rajoy’s government is set to turn the clock backwards with the introduction of much tougher sanctions on the sale and consumption of marijuana and other drugs.

To wit, from El País:

As part of a raft of controversial measures under its so-called Citizen Safety Law, the government is now proposing to triple the minimum fine for possession of drugs in public [to 1,001 euros] as well as banning the cultivation of marijuana plants for personal use [with fines of up to 30,000 euros] – despite private consumption remaining legal. The possibility of waiving fines in exchange for undergoing treatment is also to be withdrawn.

Opportunism and Hypocrisy

It is merely the latest example of bare-faced opportunism and hypocrisy from a government that regularly pontificates on issues of morality while trying to dodge a raft of corruption charges. On the one hand, it criminalises and ruthlessly punishes an activity — the consumption of marijuana — that most experts now agree is far better treated as a health problem, while on the other hand seizing the opportunity to use the guesstimated funds generated by that activity to massage its own economic figures, thereby preserving the carefully erected façade of economic recovery.

As for prostitution in Spain, it is broadly accepted and legally tolerated. Indeed, according a recent article in the UK Independent, Spain is one of the world’s capitals of prostitution:

Prostitution is so popular (and socially accepted) in Spain that a United Nations study reports that 39 per cent of all Spanish men have used a prostitute’s services at least once… far higher than the 14 per cent in liberal-minded Holland, or in Britain, where the figure is reported to oscillate between 5 and 10 per cent. And that was just those men willing to admit it.

Unlike in Holland the women involved in the trade enjoy no labour rights or social security protection. They are doomed to eke out a precarious living in the economic underworld of “System D,” the chilling, Orwellian term frequently used these days to describe the informal economy.

As in Greece, the crisis in Spain has fed a massive boom in the trade. According to a U.S. State Department report on trafficking, there are anywhere between 200,000 and 400,000 women working in prostitution in Spain, an estimated 90 percent of whom are victims of people traffickers. Fuelling the boom in the sex industry are many factors, including porous borders, lax laws and the rise of brothel tourism. Until 2010, Spain did not even have a law that distinguished trafficking from illegal immigration and arrests of traffickers and services for trafficked women remain few and far between, according to experts.

All of which does not bode well for Spanish and foreign women living on the edge of financial desperation. As for Spain’s desperate government, the timing of the change in EU accounting practices could not have been better. So long as authorities continue to turn a relatively blind eye to the sex trade, Spain’s new GDP component should keep on growing. The Rajoy government can also expect strong performance from the other new GDP component, illegal drugs sales.

According to some experts, Spain is already Europe’s largest narco-state. In the words of Roberto Saviano, the prize-winning author of Gomorra and Zero Zero Zero, Spain moves more cocaine and hashish than any other country in Europe:

For 20 years Spain has been the European gateway for the cocaine market. Apart from Spaniards, everyone knows that Spain is a country where narco-bosses go to live…. Whenever convenient, Spanish politicians ignore this huge problem. Among the first people to invest in Spain after the fall of the Franco regime were [the Italian mobsters] Antonio Bardellino, Nunzio de Falco and the Tano Badalamenti organisation. That’s why they call it the “Costa Nostra.”

In September, the value of all income-producing activities, including the Costa Nostra’s production and sales of illegal drugs, prostitution and black market sales of cigarettes and alcohol, will be a staple element of GDP, not only of Spain, but of all European economies. We can debate the morality of this move till the cows come home, but one thing that is undeniable is the convenience of the EU’s timing.

The Growth Delusion

At a time when the formal economy is stagnating and public debt is exploding to wholly unsustainable levels, the only weapon the EU has left in its arsenal is creative accounting. The reasoning is simple: as long as the facade of economic growth can be maintained, the levels of public debt — the only thing keeping the continent’s banking system and economy from imploding — can continue to grow.

And what better way to preserve the facade of growth than to include a component that is not only growing at an unprecedented rate — the shadow economy (encompassing not just drugs and prostitution but all undeclared income-generating activities) is now estimated to represent well in excess of 10 trillion dollars worldwide — but whose growth is almost impossible to track and calculate with any degree of accuracy?

In the most perverse of ironies, the elusive shadow economy, long the bane of governments worldwide, may be about to save their skin — for a little while longer, at least! By Don Quijones, Raging Bull-Shit

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