In what appears to be another déjà vu all over again move by the Troika (European Central Bank, European Union, International Monetary Fund), they have likely ensured Spain will exit the single currency.
Why? The economic policy elixir consistently doled out by the Troika has proven lethal for Greece. And it is the exact same formula they are making Spain swallow!
The key problems facing Spain:
- Banking crisis,
- Budget deficit
- Soaring unemployment
The chart below depicts problems 2 and 3:
Click the chart for a larger view.
The problem with the Troika’s policy prescriptions is that they are so darn simplistic and do not take into account the powerful impact of profit incentives to grow an economy. In short, the bureaucrats in Europe, just as the bureaucrats in the United States, never seem to understand the power of the invisible hand of the market … a phrase coined by Adam Smith.
According to Smith, by trying to maximize their own gains in a free market, individual ambition benefits society, even if the ambitious have no benevolent intentions. Or put another way, give a person an economic incentive and good things will happen. Take away those incentives, and see the economy merely as a data set, and you miss what makes economies grow. The Troika sees only data sets, it seems.
So, in their infinite wisdom, the Troika has told Spain that if you want us to bailout your banks, you will have to destroy your economy. Well, they didn’t say it in exactly those terms, but that will be the net impact of the Memorandum of Understanding the Spanish government was forced to sign this week.
The Troika’s favorite two words are “structural reform.” This means the government must make draconian cuts to its budget while at the same time increasing taxes. On paper, this makes sense. In the real world it doesn’t work when your economy is already reeling in the midst of crisis.
For Spain, structural reform means increasing Value Added Taxes (VAT) — a tax on consumption — from an already whopping 18 percent to 21 percent and slashing 65 billion euros from the public deficit. In addition, they’ll cut unemployment benefits and civil service pay.
This is exactly the policy Greece was forced to follow in order to get the bailout designed to put their economy on track for growth. Prior to the rescue, Greece’s economy was growing at around 1.6 percent annualized.
According to Troika forecasts, there would be some blowback on Greek growth as they implemented this policy to ultimately reduce debt levels and pave the way to nirvana. And they estimated Greece’s GDP would fall about 1.1 percent. Instead it cratered 6.9 percent annualized back in 2010.
The Troika policy crushed the Greek economy because it drained credit, forced unemployment up, and hurt businesses given the rising tax burdens. The result was sharply higher bond yields, which meant Greece could no longer borrow on the open market.
Now, on top of that …
Spain Is Starting from a Worse
Position Than Greece Did!
Spain’s growth is already a negative 1.2 percent annualized before trying to implement Troika reforms. And unemployment is much higher in Spain than it was in Greece before Troika “structural reforms” pushed unemployment up even more.
Click the chart for a larger view.
Greece is on the verge of becoming completely ungovernable. And since the Troika has launched Spain down the very same path, you can expect to see the following for Spain:
- Rising unemployment rates
- Cratering growth rates
- Rising bond yields
Add it all up and you’ll agree that it’s leading to Spain’s exit from the single currency (aka euro).
Best wishes,
Jack
{ 4 comments }
If the US doesn’t make profits a priority soon, we’ll be going over the falls, too
So what is the solution – Easy to write about the problems.
What is the solutions – either way the Greeks and rest of Europe must pay for their mistake over the last 10 years. So does the American.
Whether its Austerity and the market gets killed or the false Economy that the US is inducing both must pay the piper
You must settle Debts – you can’t roll over debt endlessly until end of time.
The solution is to take interest RATE up, yes up – allow for real capital formation through savings – take the hard medicine but allowing Savers to Earn a safe Risk free return.
Madness – Discuss is needed – either way at this time we are all screwed – But if we allow for the naturally progression of the economic active to solve the problem.
By increasing the rates the weak hands will be forced out – people are holding on to assets that they can’t afford and can only afford due to zero Rates.
You raise rates and the people scream for the heroine of Zero Rates – this the last Decade.
Inflation is economy and it’s again hurting savers – no capital formation is taking place through savings – Risk free investment – instead the Central banks want activity through high risk to allow the economy to grow it’s way out.
The trouble is the people with Cash are Savers – Normally old people and they need their money for retirement they do not invest –
Bank don’t get a yield from Savings hence they do not want to do business.
Price are to high for activity to take place and inflation is eating up the poor ability to save.
Negative Feed back is to high.
Lastly – if Interest Rates are higher then inflation will come down and your pay check will go further – yes i can hear everyone say that’s if you have a job because higher rates will kill jobs.
I say a debate about this is needed as through out history lower rates hasn’t let to more jobs – it’s didn’t get you out of the depression.
My thinking is that of longer term not how to solve the economy today. Like i said already we are screwed for the next 5 years regardless and if history has taught as anything then lower rates didn’t solve the problem – Yes it help the Wealth and the few –
Weiss – this ties into your Sound Dollar policy – if the RATES are higher it will attract Capital for the long term Investor.
I don’t have the answers but i rather debate them than to keep reading articles telling me the obvious that we are in Crap over the next 5 – 25 years.
thank , you very much jack!! what cant one say, too this future !! harald
Jack,
The Eurozone will most likely emerge a smaller group of stronger nations over the next few years. Expect Greece and Spain to leave and go it on there own again. Quite honestly, I don’t see what was so wrong with each of these nations having their own currency as they did before. It seems that they ran into trouble only after joining the Eurozone. Also, any country wishing to be part of the Eurozone must give up their right to print their own money. Perhaps the US and England wish to be the only countries that can do this so that they can “inflate” their way out of their own debt problems and not let other countries be able to do so.