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Austerity: The Real Euro Crisis Begins in Spain

For months, I’ve tried to explain that the real reason for concern regarding the euro is Spain, not Greece. Greece is largely symbolic; and easy fodder for conservatives to make a false equivalency between the poor in the U.S. and the “lazy Greeks”. In spite of all the baseless claims and bumper-sticker slogans tossed around by conservatives with plenty of money, austerity is not working anywhere in the world during this downturn…and it won’t work in the U.S. either.

“Crisis” Takes On a Completely New Meaning with Spain.

There are so many crises in Spain it’s hard to list them all. Greece’s entire economy is equivalent to Delaware’s, with a GDP of $265 billion. Spain’s GDP is over $1 trillion.

English: Logo of the Trademark Bankia Español: Logo de la marca Bankia (Photo credit: Wikipedia)
The major and immediate crises in the troubled economies are:

Liquidity crisis
Debt crisis
Banking crisis
Economic crisis
Confidence crisis
Investor crisis
Jobless crisis.
Spain, the ailing euro zone’s latest problem child, has them all.

As the problems pile up, the euro zone, just in the past week, has had increasingly worsening conditions come to the forefront.

May 13-Chancellor Angela Merkel’s party suffered a stinging defeat at elections in Germany’s most populous state, one likely to embolden her political opponents both at home and abroad, as the Social Democrats won the parliamentary election in North Rhine-Westphalia.
May 16 Chancellor Angela Merkel of Germany said that she was ready to discuss stimulus programs to get the Greek economy growing again and that she was committed to keeping Greece in the euro zone, signaling a softer approach toward the struggling country. “I have the will, the determination to keep Greece in the euro zone,” she said in an interview on CNBC.
May 22 The Organization for Economic Cooperation and Development cut its growth forecast for the euro zone and said in a report that Europe risked creating a self-sustaining cycle of decline that could have dire effects for the world economy.
May 23 At a summit meeting in Brussels, regional leaders failed to signal any significant new steps to stimulate the sputtering regional economy. Nor could they resolve the competing agendas of President François Hollande of France, who favors stronger action to spur growth, and his German counterpart, conservative Chancellor Angela Merkel, who has opposed aggressive moves to ease the pressure on Europe’s weakest economies.
May 25 Standard & Poor’s slashed its ratings on the creditworthiness of five Spanish banks, just as one of them, Bankia, the nation’s largest real estate lender, requested an additional 19 billion euros in rescue funds from the country.
May 28 Spain’s borrowing costs approached record highs as investors fretted over how the government would find additional money to bail out Bankia, the country’s largest mortgage lender, and other troubled banks.
As America fiddles as Nero in Rome, Republican obstructionism and their singular purpose of destroying the sitting President, the U.S. will be by far the biggest loser outside of Europe, should the euro fail. And Americans seem totally oblivious to the Republican agenda of performing the same austerity measures on the U.S. once their bloodless coup at the hands of a handful of billionaires is complete.

Meanwhile, Spain’s Prime Minister Mariano Rajoy’s five-month-old conservative administration feels like a government under siege. Anxious top officials are reluctant to speak on the record for fear of slipping up. Policymakers contradict one another. Plans keep changing. Financial markets stagger amid the uncertainty. The gloom in ministry corridors is palpable.

The latest error in judgement: after weeks insisting that one of the country’s biggest banks, Bankia, did not need fresh funds, ministers dropped the bombshell last Friday that there was a 23-billion-euro hole in the accounts. They have yet to explain clearly how they will find the money when they are already struggling to finance a spiraling national debt.

The effect of the Bankia news on already fragile financial markets was predictable. Spanish shares dived to 9-year lows, the euro sank and investors fled Spanish government debt.

American Voters-Does This Sound Familiar?

To hear the officials in the conservative government tell it, outsiders simply have it all wrong: Spain has lived beyond its means for too long and is now going through a painful but necessary period of adjustment to shrink its state sector, cut spending and boost competitiveness. All the right things are being done. Rajoy’s government is serious, committed and enjoys a comfortable parliamentary majority. Sound familiar?

As it is in America, unfortunately, time is running out for Spain and austerity will make it exponentially worse.


Despite fresh proposals from Brussels on Wednesday that could go some way towards offering Rajoy what he wants, Europe’s paymaster Germany has yet to fulfill Spain’s wish list.

Spanish depositors are jittery. Financial advisers tell of calls from members of the public unsure what to do with their money, asking for advice. Stories abound of the wealthy moving their money to the relative security of London, Germany or France. Official bank deposit figures are published later and later with a big time lag: the latest numbers, for April, are due to be released in early JUNE.

Spanish bankers insist that there will be no bank runs. But ministers in private are clear about their wish to see European-wide bank deposit guarantee measures put in place quickly to avoid the risk of what could be a catastrophic event.

Additionally, with the cost of borrowing heading rapidly towards 7 percent and most foreign investors already shunning Spanish debt, the government will find it increasingly difficult to refinance 98 billion euros of debt and find another 52 billion euros to fund its deficit this year.

Local banks are barely lending, increasing the risk of a chain of bankruptcies, which could send the economy into a nosedive. The banking system’s total loans to the business sector were 44.6 billion euros at the end of March half of what they were at the end of the boom in 2007, and the contraction continues almost every month, according to Bank of Spain data.

Consumers are postponing big purchases and cutting back spending. Spain’s soaring borrowing costs have become a national obsession since the crisis. The government acknowledges that the situation is critical.

These are the types of occurrences that U.S. backers of Republican conservative philosophy refuse to acknowledge in an economy devoid of consumerism and a strong middle class.


Instead, Berlin, just as Republicans in the U.S., preaches austerity. The resentment in Madrid is very apparent; as it is in Italy, Ireland, Portugal, Greece, and the U.K. (which has officially slipped into a double-dip recession on the heels of a two-year policy of austerity and drastic cuts in government spending).

Top officials across Europe mutter about how today’s European Union consists of a “German Union plus the rest” and local businessmen make unflattering comparisons with Berlin’s domination of Europe in World War Two.

A commonly heard view among top Spanish bankers, officials and diplomats is that Spain is “too big to fail”.

It is inconceivable, they say, to imagine the euro zone without its fourth biggest economy. Spain’s future is inextricably linked to Europe’s future. So Germany is bound to agree reluctantly to change course and allow the ECB and the bailout fund to support Spain.

“It may go down to the wire, it may get very bad,” one senior diplomat in Madrid said. “But Germany has to choose. With Greece it did not have to choose. It could allow Greece to fail. But if Spain fails, Europe fails. So in the end we have to believe that Merkel and the Taliban of the Bundesbank (German central bank) will change their minds and do what they need to do to save Europe.”

In the U.S. it will come down to this November’s election. If the Republicans take hold of the purse strings inherent with political control, the middle class will continue to shrink, consumerism will not be revived, there will be nowhere the U.S. can export its goods, and austerity in all areas except defense will lead to the same public resentment and eventual U.S. revolt.

You only have to look to Europe to see the proof.

Source: HgTransEcon


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