Why this Won’t Work out for Spain

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”

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  33 comments for “Why this Won’t Work out for Spain

  1. r cohn says:

    5y bonds=.267%
    10y bonds =1.198%
    Bond holders do not seem to be worried even with political problems and the real possibility of Catalonia separation

    • Chip Javert says:

      Besides the Spanish (and other EU banks), I wonder who is buying these bonds. Remember, sovereign bonds are “risk free” to the EU central bank.

  2. It makes as much sense to treat a sluggish economy, with low per capita GDP, which is producing the excessive deficit ratios, with “austerity,” as it does to treat a patient with anemia by blood-letting, without examination and diagnosis.

    There does indeed appear to be a serious “problem,” but it is a systemic one resulting for the imposition of an economy based on continually expanding debt, which will not and cannot be solved or corrected by bleeding the 99% white though “austerity.”

    Spain’s [and the other developed economies] *apparent* deficit problems appear to have far more to do with what the deficits and government jobs “produce,” than the simple existence of the deficit and make-work jobs per se. An important exacerbating or amplifying factor is the significant and increasing tax avoidance/evasion of the supranational corporations and 1% elite.

    Another critical factor is an obsolete accounting methodology which overemphasizes the relevance of “GDP” in the new socioeconomic epoch of “globalization,” while minimizing the importance of [apparent] loss producing activities such as governmental ownership/operation/subsidy of mass transit, rail and port facilities, and other infrastructure, which in fact support much, if not most, of the vaunted “private” sector.

    There is also the problem of “short v long” in that reduction in governmental funding for critical civil activities such as education, public health/safety, the social safety net, and medical care can indeed show immediate short-term cost avoidance, but incurs enormous long-term costs, not only money, but also citizen alienation and societal unrest.

  3. nick kelly says:

    I watched an Italian pundit of some kind on Squawk Box Europe a while back and Steve (ears) Sedgewick asked him what was the difference between Spain and Italy ( or let’s say a pot and a kettle)
    His answer: ‘We have an economy and they don’t. Do you ever see anything made in Spain, I never do’ ( sic)
    Even with all the warts on Italy, there seems to be something to this- the pot is less black than the kettle. I see lots of Fiat 500’s where I live- I assume they are made in Italy. And like the Italian, I have never seen anything made in Spain.
    Re: Spain’s overspending- would living within its means, instead of on a burst real estate bubble- not be austerity?

    • zalacain says:

      I’m always amazed at how ignorance is used as an argument. Spain produces as many cars as as Italy and the UK together. Think about that. Spain population 45 million, the UK and Italy combined population 120 million. Here, we are not taking into account Spain’s enormous car part industry or commercial vehicle production (the largest in Europe).
      We could go into what else Spain produces, but the list is frankly too long and I don’t consider it my job to educate you. Spend a little time on google before saying the first thing that comes into your head.

      • Tim says:

        Nice, maybe DQ can do an article to show us these kinds of things, the diversity in the Spanish economy? Thank you zalacain!

      • nick kelly says:

        I will admit Spain makes a lot of cars, way more than I thought- however in cars exported ($ value) it is actually behind the UK alone.
        Spain is 7 world wide, which is more than I thought.

        Soooo, why is the place so messed up, with millions of empty housing units still carried on bank books at full value?

        • zalacain says:

          Spain is messed up because it has too much corruption and is still recovering from a borrowing binge due to too low interest rates 10 years ago. However what has happened since the 2007 crash is that Spain has gone from a country that builds an absurd number of houses to a country that has increased industrial production and exports in the teeth of the worst recession in living memory and while using a currency that is overly high due to the German economy.
          Before 2007 the Spanish economy was much worse than it looked, now it is much stronger than it appears to the casual observer.

      • d'Cynic says:

        You can argue to the end of time whether the Spanish economy is more eviscerated than the Italian, or the other way around. The fact is both are, and that is the reason you don’t see their consumer products in the supermarket near you.
        China has taken over the factory floor, and it did not even have to fight for it very hard.
        It was the elites meme that it should produce the low end stuff. It did not occur to them that China would not want to play ball, and go for the high end, too.

        • zalacain says:

          Still you have no idea what you are talking about. Spain exports warships to Australia, trains to Kazakhstan, and builds the fast train to Mecca in Saudi Arabia or leads the enlargement of the Panama canal. Hardly stuff you see in supermarket shelves. Although of course the supermarket shelves of Europe are groaning under the weight of Spanish (and Italian) produce.
          Inditex, the world’s biggest clothes retailer is Spanish. Both Italy and Spain have huge fashion industries.

          I’m not discussing which economy is in better or worse shape, I am saying that to say that Spain doesn’t produce anything displays ignorance and, lets face it, bigotry.

        • d'Cynic says:

          To zalacain:
          Do not get too worked up. I did not single out Spain in particular. Regrettably, you did not mention the Spanish movie industry, which is, or used to be one of the best.

      • Argus says:

        Spain would be better off (exports boosted, tourism etc) if it had its own currency and could devalue.

  4. nick kelly says:

    BTW: public sector hiring in an already bloated sector is ironically a form of austerity. Each public sector hire after a certain point, increases GDP ( if you build a pyramid you increase GDP) but diminishes the private sector because it has to be extorted to support the non- productive public sector.
    In other words, the more the public sector is fattened up, the leaner the real economy must become.
    What is stimulus for the public sector is austerity for the private sector.
    The end game, tragically, is being played out in Venezuela, where all the good leftist intentions can no longer prevent the strong from devouring the weak. What a testimony!
    BTW: if you attend a funeral in Venezuela, bring a perfumed handkerchief. There is no embalming fluid and due to power cuts, refrigeration is iffy.

    • WorldBLee says:

      You are (incorrectly) assuming a 1:1 correlation between public spending and private taxation while ignoring the multiplicative effect of the imaginary public sector hire–which, unless it is a very high end job, will likely ALL be spent with most of going right back into the local/national economy.

      • nick kelly says:

        Some time ago, it was recorded that half the work force in Buenos Aires province worked for the government.
        But this was not a communist economy, the government owned little in the way of industry- this was an army of bureaucrats, administrators, assistants to them, etc. etc.
        The only problem is that we essentially live in a barter economy- with money a medium of exchange to facilitate the process. In pure barter, if you have chickens and want shoes you have to find your opposite.
        But when an army of bureaucrats clocks off- they don’t want to exchange with other bureaucrats- they want stuff- beer, bread, whatever.
        But since half the work force is not available to bake, brew, etc.
        there is a shortage and prices rise.
        So the government prints money.
        In Argentina this has lead to a currency collapsing, and being replaced with another currency.
        But all these places have bloated public sectors.
        When the public sector gets much past 25%- it hijacks the ballot box, and votes itself more raises.
        Then when it runs out of money to the point where it needs an emergency loan from the IMF or in Europe the ECB, and the lender tells them they have to cut public sector expenditure, everyone screams that democracy is being trampled.

  5. John Doyle says:

    The welfare of member nation’s citizens is of no import to the Troika. Cut that welfare budget! let them starve and live on the streets. That 3% is sacred. PS! Don’t cut any expenses to the top table, they are us.

    The fact is that few economies today are paying their way. The Eurozone can’t change that, but it wrote out its manifesto based on what was happening back in the 60’s when the economies were still growing, still producing and selling. Maybe 3% then was an option[?]

    That world is gone. Debt fuels the pretence that we are still growing, when at best we are standing still. The decline in jobs and the decline even more in productive jobs compared to service sector work is everywhere.

    The Eurozone is doomed. This level of dysfunction is a recipe for a crash and burn. The citizenry is not long going to stay silent now Brexit has broken the spell.
    But who is going to take charge? Any idea, anyone?

    • nick kelly says:

      The Greater German Reich- someone has to do it.
      OK- that is sort of a joke- but I think Germany shows the way forward- by among other things cooperation between unions and management. A union member sits on the board of VW for example.
      A Brit will say- oh, you’re in bed with the company are you?
      And the German might reply: of course. we live or die together.
      When VW struggled for life in 46- 48, you got paid in groceries and you had to wade over a flooded floor.
      30 years later the 15 million Beetle rolled off the line, overtaking Model T.
      Not many days lost to strikes though.

    • Argus says:

      Who is going to take charge, indeed. The world is full of managers but few true leaders.

  6. jan frank says:

    I think you’re being a little harsh. Spain doesn’t perhaps make things like Italy does, although one does see Seat cars and Rioja wines abroad, but it does have a very flourishing export industry. Really? Yes, but a so-called invisible export industry. It is still one of the major tourist destinations in the world . perhaps not something to be proud of, like being the home of Lamborghinis, but it does earn a lot of euros coming from other countries. According to a Wikipaedia article exports have risen in Spain from about 29% in 2009 to 35% in 2014.

    • nick kelly says:

      They have risen to 29 % of what? What are they exporting? German manufacturing is only 10 % of the economy ( 5% in UK)
      Spain. like Ireland, in 2008 had about 25 % of the labor force in that good old time religion- real estate.
      There is one big problem with moving from the politically incorrect: First World, Second World, Third World, to Developed World, Developing World.
      We went from three categories to two.
      Fact: Spain is not as industrialized as Germany, France, or Italy.
      It is essentially a second world economy that got the EU credit card and tried to borrow its way to a first world economy.
      Real estate is the crack cocaine of economies- wreaking havoc where ever it goes.
      BTW: where I live in BC Canada, there are many Latin American wines, some Italian but no Spanish.
      Bur they make good wine.

      • nick kelly says:

        I have to clarify- now that I reflect I think I’ve seen that Spanish wine you mention- but Chile has its own section.

      • zalacain says:

        Fact. You have no idea what you are talking about. Spain has more industry as a percentage of its GDP than France, Italy, the UK or USA. Read my post above. Don’t embarrass yourself writing this stuff.

      • d'Cynic says:

        According to reports I read, Italy has the second largest industrial base in EU after Germany – and probably concentrated in the north. That would exclude Switzerland which is a small country. I do not know how they make these blank comparisons.
        Just to throw in some anecdotes I have heard, Italian industrial product like machinery are sold like some fashion items: good looking but not that lasting, or cheap but with no after service.

        BTW: wine selection in a particular place is a tricky business. For starters, Spain produces a lot of Rioja wine which is not what most consumers are conditioned to drink, like Merlot, Cabernet, or Pinot.

      • d'Cynic says:

        Buying wine for a party is somewhat like investing. Do you buy a wine that has a 90+ rating from Parker, or do you go out on a limb and buy what taste good to you?

        • Argus says:

          For the price you cannot go wrong with some of the South African wines or those from the Douro and Alentejo regions of Portugal.

      • jan frank says:

        Sorry about that. I should have written ” from 29% of GDP to 35%”. All it means is that Spain is earning money coming from abroad. However, this is NOT so much money earned by selling Seat cars or Rioja wine, but by the “invisible” export of tourism. It is called “invisible” export because you don’t see cars/machinery/ore/wheat being loaded into containers, but it is none the less an export industry. Just like in the UK, whose “visible” exports have been declining these last 100 years, but whose “invisible” exports, such as insurance and financial services earn more than half of their exports.

  7. nhz says:

    Spain is hardly different from the rest of the EU. All are postponing the inevitable by going deeper into debt (cheaper than ever thanks to the ECB) and all kinds of financial trickery to bribe as many voters as possible. Whether through more useless public jobs, too generous pensions, childcare subsidies, homebuyer incentives etc. basically it’s the same everywhere.

    Even Germany itself would be in much worse shape if their customers had to pay for the products with real money, instead of buying with money they don’t have like they do now. It’s telling that several big car companies like VW established banks in 2008 or so (subsidized/guaranteed by the taxpayers!) to push car sales and lease even more.

    As to ‘austerity’, in most countries this just means that some of the most idiotic policies of recent years (e.g. increases in government salaries and pensions of over 100% in just a few years like they did in Greece) are gradually being reversed. The trouble is that the people who now pay the bill for years of policy failure are often not the same ones who profited from the debt boom. The elites are doing great, and in most countries (ex-)government workers still enjoy an excellent position compared to workers for private companies and the self-employed. The sectors that caused most of the damage, banking and real estate, are still being protected everywhere in Europe and the rest of the economy suffers.

    For EU politicians calling an end to the debt fuelled party of the last 15-20 years is clearly not an option.

  8. Sid says:

    Surely the biggest offenders in Europe are the ones running a budget surplus?

    • r cohn says:

      Almost all countries in the Eurozone are currently running significant deficits
      Germany with a tiny current surplus of %.249 is the only exception.
      While Spain is running the largest deficit of the large Euro countries@%3.81,it is closely followed by GBritain@ %3.58,France @%3.38 Belgium @%2.49 and Italy @2.46%.

  9. r cohn says:

    The current deficits of all western countries(and Japan) will pale in comparison to their future deficits fueled by medical costs and”welfare ” to the elderly.Something has to give.This will take the from of either a limit in payments to the elderly or a debt default or a currency collapse or all of the above.

Comments are closed.