Spain has a few choices in order to start dealing with the pain the country is experiencing. None of the choices look very attractive, but something must be done in order to start fixing the economy. Mr Rajoy, what u gonna do? Via the think tank Carnegie Europe
In the great debate over the economy we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to Spain.
For many years, thanks partly to bad policies in Spain but mainly to aggressive attempts by Germany to achieve growth by forcing a trade surplus onto its European neighbors, Spain, and many other countries in Europe, ran enormous trade deficits. It is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.
Guest post by Peter Tchir.
Go Ahead, Make My Day
Greece has negotiated like the Clint Eastwood that spoke to an empty chair for 10 minutes. It is time to bring out the Dirty Harry. Point a magnum at the Troika and tell the “go ahead, make my day’!
Greece has been asking for money in some form or another for almost 3 years now. It begs and pleads. It is forced to do things to its people. Then it is back to begging and pleading. It is time to stop. The negotiations have been stupid. Not once has Greece come up with a credible alternative to more Troika money.
The Troika actually benefits as much, or more from supporting Greece and everyone would be better off if Greece was given real breathing room for a change. Since the Troika either doesn’t see it, or refuses to believe it, it is time to make the Troika see the error of the ways.
Defaulting Takes Planning
Defaulting, properly, is as much a process as anything else. You need to plan. You need to line up post default financing. You need a credible story of why investors should come to you post default. Sovereign defaults are particularly tricky since there are few rules to begin with, and enforcing those rules is tricky.
CBO on the Fiscal Cliff situation and implications on the Economy.
Substantial changes to tax and spending policies are scheduled to take effect in January 2013, significantly reducing the federal budget deficit. According to CBO’s projections, if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013. After next year, by the agency’s estimates, economic growth will pick up, and the labor market will strengthen, returning output to its potential level (reflecting a high rate of use of labor and capital) and shrinking the unemployment rate to 5.5 percent by 2018.
Guest post by Marc Chandler of Marc to Market.
Eventually, the enlargement of cross-border capital flows and their concentration on Eurozone countries brought about by the euro will have to be unwound. Only when these flows reflect long-term viable investment opportunities will they no longer constitute a danger for the stability of the euro.
This requires a shrinking of current account deficits as well as surpluses of EZ countries. However, in view of the structural savings surpluses of some EZ member countries, intra-area current account adjustment alone will probably not be enough. What is also required is a redirection of the current account surpluses to countries outside the Eurozone. If the private sector is unable to do this because of its reluctance to assume exchange rate risk, the public sector may have to help. In any case, an increased demand for foreign assets will lower the exchange rate of the euro, which will facilitate efforts by the deficit countries to overcome recession by an expansion of exports.
Markets have been cheering Apple, and no news regarding the European situation is seen as good news. With one stock dictating the world markets, one should probably be cautious regarding the overall market. Meanwhile, the Spanish agony persists. Via El Pais.
Villages of the damned. (austerity hits the man).
The blame game has only begun. The best defense is offense, as Rajoy blames Zapatero for the mess. Irrespective of who created the mess, Spain needs to start dealing with the deep problems the country faces. From El Pais;
Prime Minister Mariano Rajoy on Monday blamed the swingeing cuts in spending included in this year’s state budget on the errors of the previous administration, and argued that without the austerity drive Spain would face the same fate as Ireland, Portugal and Greece in needing a bailout.
The public deficit last year came in at 8.5 percent of GDP instead of the six percent pledged by the outgoing Socialist government. The Rajoy administration last Friday unveiled an austerity budget including savings of 27 billion euros, in order to meet the deficit target for this year of 5.3 percent of GDP.
“If the previous government had met its deficit target of six percent, the cuts would have been 18 billion euros less,” Rajoy told a meeting of his Popular Party’s executive committee.
Spain has been under recent pressure, despite the SPX taking out new year highs. If investors were nervous about the Greek situation, they should be paying more attention to Spain and the economic developments taking place on the Iberian peninsula. Unemployment, GDP, Debt are all pointing the wrong way. If it wasn’t for the LTRO…..
Latest on the Spanish economy by the Ministerio de Economia y Competividad. Full presentation worth a proper read, in English, click here.