The European Union on the verge.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Since the granddaddy of all housing bubbles popped in Spain between 2008 and 2009, unleashing one of the deepest recessions in living memory, the nation’s public debt has more than doubled, from just over 40% of GDP to almost exactly 100% today. Last year, despite the fact that Spain grew faster than almost any other European economy, the government managed to rack up a deficit of 5.2%, one full percentage point above the target that it had set itself a year earlier and over three percentage points above the Eurozone average.
It’s the third-highest deficit-to-GDP ratio in the Eurozone after Greece and Portugal. That’s some claim for Europe’s supposed economic success story.
This is 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. 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.
But still there’s no sign of progress. None of which should come as a surprise. As WOLF STREET warned in October, it was plain as day that the Spanish government would fail to rein in its spending during the run-up to a tightly fought general election. Brussels was completely aware of this fact and did nothing to address it, for obvious reasons: political expedience.
Brussels along with Spain’s big banks, corporate giants, and the Troika wanted the conservative Rajoy government to win December’s do-or-die general elections. They’d do “whatever it takes” to keep the narrative intact that the Spanish economy has never been better.
At the time, the European Commission postponed a negative opinion on the Spanish budget for 2016 that had been drawn up with one basic goal: to buy off as many gullible voters as it takes to tilt the electoral balance in the government’s favor. Austerity got suspended, spending was hiked, and tax cuts were brought forward. The idea was that everyone would go to vote feeling just a little better about the government.
Unfortunately for the Rajoy government, not enough Spanish voters were gullible enough to vote it back into power. Now in a strictly caretaker capacity, the government must try as hard as it can to pretend that it is doing everything it can to reduce this year’s budget, while doing absolutely nothing. Meanwhile, Europe’s Commissioners will work tirelessly around the clock trying to present the illusion that they actually believe them.
The alternative would be to take concerted action against a weak, unpopular government that the European establishment would very much like to see reelected, despite its proven inability to improve public finances — and proven ability to make public funds vanish and later reappear in obscure offshore bank accounts.
Pierre Moscovici, the Commission’s main budget enforcer, has announced that a final verdict on Spain’s situation would come in May. While the Commission could use the occasion to make Spain the first Eurozone country ever to have EU sanctions imposed for “fiscal malfeasance,” it’s far more likely to take a softly-softly approach, as it has in recent dealings with France, Portugal, and Italy, which have all seen their debt levels rise. Indeed, Italian and Portuguese debt, relative to GDP, are now higher than Greece’s was when the crisis began in 2010. Spain is not that far behind.
But for now, the Commission’s hands are tied. If a new course of harsh austerity measures were prescribed before the next round of Spanish elections, scheduled for June, it could rip asunder the carefully constructed facade of Spain’s economic miracle, obliterating Rajoy’s already floundering reelection hopes. It would also dramatically improve the electoral prospects of the anti-austerity Podemos party, the last thing the Troika wants.
More important still, until the British referendum on EU membership is held, on June 23, European institutions are clearly on strict instructions to present a more magnanimous face. Even the Troika of international creditors appears to have adopted a more laissez-faire, hands-off approach to the national economies ostensibly under its charge.
But putting off dealing with what are clearly massive issues — in particular Greece’s deteriorating state of insolvency — is not without its risks. In Spain, fears are already growing that the north-eastern region of Catalonia, whose debt is already mired deep in junk territory, and whose economy represents 20% of the national economy, could be on the verge of descending into a Greece-like debt spiral. By Don Quijones, Raging Bull-Shit
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