With Impeccable Timing, ‘Economic Miracle’ in Spain Unravels

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 spiralBy Don Quijones, Raging Bull-Shit

Relations between the ECB and Germany have curdled. Negative interest rates and helicopter money have roused anger in Germany and have fueled the stellar rise of right-wing populist AfD party. Now politicians feel threatened in their cushy seats. Read…  “We Cannot Afford another Draghi”: Germany Attacks ECB

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  18 comments for “With Impeccable Timing, ‘Economic Miracle’ in Spain Unravels

  1. nick kelly says:

    But if the EU does get tough ( i.e., realistic) with Spain, instead of pretending to believe it, won’t there will be a huge cry of: ‘Austerity? Against the wishes of a democratically elected government? Is Germany to rule Spain?’

    We’ve heard that song so often we’ve got it on the brain.

    • Kevin Lohse says:

      Yes, there will be, and the song is a protest about the right of a country to govern itself and not be subordinate to alien institutions. It’s why political and financial Union in Europe will never work.

      • Chip Javert says:

        This happens when citizens (or “subjects”) freely vote away their sovereignty (i.e. join the EU) so they can get free stuff.

        Looks like it’s getting harder to find free stuff.

  2. Kevin Beck says:

    Further evidence that the European Union was a bad idea, both economically and politically. No need for me to repeat all the reports of its demise.

    To the people of Great Britain: I hope you seriously consider the problems that have been magnified by this “unification,” and make the right decision this year about your future as it relates to the continent. If I were a British subject, I would not give a second thought about voting for separation. And as far as what America’s disaster said about it taking 10 years to renegotiate trade deals with your nation: How would he know? He’s not going to be having any input in the process in nine more months; no need to listen to that fool.

    But the question that should be asked is: Why would you want to be governed by a group of hostile continentals that can barely speak your language?

  3. Christoph Weise says:

    The economy in Spain can only be hold up by excessive spending and it has been transparent that the so called improvement in Spain was only due to accelerated accumulation of sovereign debt. Unfortunately the EU is a fraudulent organisation that employs a lot of window dressing.

  4. Lakatos says:

    Or: because government managed to rack up deficit of 5.2%, Spain grew faster than almost any other European economy !

    Cf., Spanish government discretionary fiscal deficit rises and real GDP growth returns http://bilbo.economicoutlook.net/blog/?p=33329

    • nick kelly says:

      Re: GDP -a few quarters ago maybe 3 years? the UK narrowly missed a predicted technical recession. Why? It was a cold winter and fuel bills were just enough to push GDP into positive territory. So avoiding recessions (and increasing GDP) is easy- just leave windows open in winter.
      I hope we can agree that this is not actually a good idea and that a cold winter is a hardship not a bonus. The point is that if the government spends money on ANYTHING – moving large stones back and forth- or more constructively, building a pyramid, the GDP rises.
      In the midst of Spain’s real estate frenzy- of course GDP rose- but that didn’t make it a good thing for Spain.
      What we need to measure is productive growth.

      • Don Quijones says:

        Good point, Nick. Unfortunately, in Spain the vital signs of productive growth are not looking at all good.

        While all the talk is of GDP growth, the actual level of production registered in 2014, after a year and a half of so-called “recovery,” was still 5% below the level registered in 2008. Gross capital formation, as a proportion of GDP, is down over 14 percentage points since 2007; funds for research, development and innovation shrank from €321.90 per inhabitant in 2009 to €279.30 in 2013 and there is no indication that the trend will revert any time soon.

      • d'Cynic says:

        How about pre-paid GDP, or total-debt-adjusted GDP?

        • walter map says:

          If you were to properly account for public and private debt in GDP statistics you would very quickly discover that the financial industry is sucking out wealth faster than the real economy can produce it.

          For obvious reasons no government will issue such statistics, but you’re welcome to calculate them yourself and publish them from an undisclosed location in an expensive newsletter.

          Now why didn’t I think of that?

        • walter map says:

          If you were to exclude the GDP contribution of the Financial Industrial Complex, which is extractive and does not actually produce anything of economic value, you might not be surprised at the results.

  5. NotSoSure says:

    On the verge … of staying intact? BAU then.

  6. OscarGold says:

    Gracias por hablar de mi país, España.

    El euro es un error , y un invento de Goldman Sachs.

    Nos han engañado y provocado una gran burbuja.

    Los políticos españoles son unos ineptos, TODOS.

    • C in Dallas says:

      Gracias por tu escribe. Nosotros necesitamos mas personas desde Espana y Europa.

      For those of us here in the U.S.:

      Thanks for talking about my country, Spain.

      The euro is an error, and an invention of Goldman Sachs.

      We have been deceived and it provoked a big bubble.

      Spanish politicians are inept, ALL

      • walter map says:

        “The euro is an error, and an invention of Goldman Sachs.”

        Goldman Squid: “Suckers!”

        Greece was just for practice. The real target is the global economy. So far hardly anybody has caught on.

        “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

        Henry Ford

  7. Stackin' Steady says:

    @Walter Map: I agree….Goldman Sachs is busy consuming the earth’s economies….at some point the game stops. Down here, at the bottom of the pyramid, we don’t make enough to pay taxes anymore.

    • walter map says:

      “we don’t make enough to pay taxes anymore.”

      Don’t be absurd. The poor pay high taxes, and those are increasing to compensate for tax cuts for the rich. There are many examples: sales taxes, indirect taxes, uncontestable unjust fines. The poor are helpless against exploitation, a natural incentive to create more poor people.

      • Virtually every state tax system is fundamentally unfair
      • The lower one’s income, the higher one’s overall effective state and local tax rate.


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