Spain is the New Greece

By Marshall Auerback

Nearly one Spaniard in four is unemployed, according to data released on Friday, as the country’s economic and financial predicament prompted a government minister to talk of a “crisis of enormous proportions”.The data from the National Statistics Institute showed 367,000 people lost their jobs in the first three months of the year. At this pace, Spanish job losses are equivalent to 1 million per month in the United States. That means more than 5.6m Spaniards or 24.4 per cent of the workforce are unemployed, close to a record high set in 1994.

Spain has become the new Greece. Actually, in many respects Spain is now worse than Greece. The Spanish unemployment rate is already so high and unlike Athens, Madrid has made no headway in reducing its public debt levels (whereas the Greeks are close to running a primary fiscal surplus at which point they could leave and turn the problem back on to Brussels). Moreover, Spain has a huge private debt burden that is twice that of Greece.

Although I have warned on these pages before that Spain’s austerity program was leading the country to disaster, my reaction to this economic catastrophe has been one of amazement. Just take a look at this employment data

Spain First Quarter Unemployment: Summary (Table)
2012-04-27 07:00:00.13 GMT

1Q Quarterly Yearly
2012 Net Change QoQ % Net Change YoY%
Both Sexes
Over 16s 38,493.70 -14.5 -0.04% -18.4 -0.05%
Active Workforce 23,072.80 -8.4 -0.04% 10.9 0.05%
Employed 17,433.20 -374.3 -2.10% -718.5 -3.96%
Unemployed 5,639.50 365.9 6.94% 729.4 14.85%
Inactive 15,420.90 -6.1 -0.04% -29.3 -0.19%
Activity Rate 59.94% 0.00% n/a 0.06% n/a
Unemployment Rate 24.44% 1.59% n/a 3.15% n/a
16 to 64 30,606.00 -52.5 -0.17% -171.4 -0.56%
Activity Rate 74.87% 0.13% n/a 0.44% n/a
Unemployment Rate 24.59% 1.59% n/a 3.17% n/a
Employment Rate 56.47% -1.09% n/a -2.03% n/a

Yet, until now Rajoy Administration has been saying that the marginal decline in GDP estimated by the Bank of Spain for the first quarter was exaggerating economic weakness. Now we have the spectacle of the Spanish government suggesting that the Bank of Spain estimate of a .4% decline in Q1 Spanish GDP is too pessimistic. But in light of these numbers, what kind of GDP decline should one realistically expect when employment falls two percent non annualized in a quarter? At least a four percent annualized decline. more likely much higher. Yet who is talking discussing that as a real possibility in Brussels? Nobody. Everybody remains asleep at the wheel.

For years, the Spanish GDP figures have been hard to square with the underlying collapse in industrial production and rise in unemployment, both of which were more realistically reflecting the scale of the country’s collapse into depression.

When I said a few months ago that the Spanish government was lying about their numbers, I was attacked by a few Spanish readers of this blog, who claimed I was a nefarious hedge fund manager, likely loaded up to the gills with CDSs on Spanish debt who was trying to foment panic. For the record, I have never bought a credit default swap in my life. If anything, I was trying to foment panic because I was horrified by the new ultra austerity stance adopted by the recently elected Rajoy Administration.

Now consider the reality: the economy is crashing, hence the unemployment rate rise. Yet German Chancellor Angela Merkel and the ECB President, Mario Draghi, continue to insist that one can have both fiscal restriction and a lower domestic price level despite the fact that Spain has a non financial private debt to GDP ratio of 230%.

Interestingly enough, Dutch levels of private debt to GDP are even higher, at 249%, the highest in Europe. By contrast, the Italians still have net household savings. So who are the real “profligates” in Europe?.

Those who embrace these ruinous austerity policies will soon be seeing the experiencing much the same kinds of conditions as the Spanish (albeit from less depressed levels) including the moralistic Dutch, whose finance minister has been a crusader in favour of even harsher fiscal rules than those embodied in the Stability and Growth Pact.We have also recently witnessed a big surprise decline in the German consumer confidence index last week as well as a collapse in an Italian retailing sentiment index. The austerity disease is intensifying the crisis, even in the core.

It is inconceivable to me that Super Mario Draghi won’t be changing his tune soon, in spite of what he and the Merkel government are now saying for public consumption. To continue with this present course will not only precipitate a collapse of the euro, but a political collapse across Europe.

There is no question that larger deficits are needed to support aggregate demand at desired levels. However, as all of us who have contributed to this blog have long noted, the problem is the national governments are currently like US states and as such are revenue constrained because they are USERS, rather than ISSUERS of the currency (as opposed to, say, Canada or the US, both of which are sovereign issuers of their own currency).

So relaxing the deficit limits without some kind of ECB funding guarantees can cause markets to abstain from funding the national governments, which creates a solvency crisis of the kind we are experiencing today. Said another way, without the ECB the euro members are currently deep into ‘Ponzi’, as my friend, Warren Mosler has described it. In reality, they have all been in ‘Ponzi” since day one. But it took a crisis of the magnitude of 2008 to make this manifest for the markets.

At some level, the ECB understands that, as it always”writes the cheque” when a systemic crisis pushes the system to the brink. It can be no other way, as it is the sole issuer of the euro. But for the most part, Europe’s policy making elites remain in denial, as they continue to turn away from the one entity that could address the insolvency issue.

And let’s be clear once and for all. The US government does not face the same kind of crisis as the Spanish, the Greeks, the Dutch or even the Germans. The US government has expanded its public debt ratio considerably in recent years but yields remain low and when the ratings agencies downgraded their assessment of the US sovereign debt the demand for it rose. Whither the so-called “bond market vigilantes”?

The Euro governments are in a different camp altogether. All those who actually understand that the member governments are using a foreign currency and thus are not at all like Japan, the US or the UK governments, appreciate that there is default risk attached to the paper issued from the EMU governments.

They also appreciate that with the non-elected eurocrats of Brussels insisting on a decade or more of austerity and implementing fiscal rules that these would ensure a crisis every time there has been a serious downturn in aggregate demand. And with that, the risk of default with government debt has risen. That is what we are seeing today across the euro zone. And in Spain it is writ large.

The mainstream austerity line is trapping Spain (as well, as Greece, Portugal, Italy, Ireland and soon the core of the euro zone) in a dangerous downward spiral of lost income and increased unemployment. I still think Francois Hollande’s likely election could well change the political dynamics in the euro zone, even though he generally buys into the mainstream neo-liberal euro line. Hollande is an “austerity lite” character, as opposed to being a genuine reflationist. But even he cannot be oblivious to the looming political and social dangers which await France, if he continues to pursue the policies embraced by the current President, Nicolas Sarkozy.

So far, Brussels has not let facts get in the way of a good neo-liberal theory, but it’s getting increasingly hard to ignore this emerging horror show.

13 Responses to Spain is the New Greece

  1. Bayard Waterbury

    Marshall, I am impressed with your analysis. However, I must say that the US is actually similar, in many respects to Europe in the respect of “Plutomomy”. That is that the European Union, and even the individual countries, are captured by their plutocracies, which will unfailingly support their corporate and banking leadership, while nearly completely ignoring the peril of the common citizen. I would note that every time the ECB or IMF formulate a “rescue plan” it is directed to supporting the bond pricing to protect the investors and banks. The problem is that this strategy in Europe, as well as America, acts to suppress real economic activity, and ultimately leads the economies of member states into abysmal recessionary trends that simply can’t be overcome by any present policy. Spain just happens to be the current weak link, although the idea of the other weaker states such as Ireland, Italy, Greece, and Portugal being seen as improving, and somehow out of the woods, is absurd. Spain may be the first to go over the cliff, but my belief, as well as yours, apparently, is that this is just a matter of time. My view is also that with more than a quadrillion dollars worth of derivates circling the planet, the collapse of any of the weaker economies in Europe is likely to create a massive, insurmountable domino effect which will also wreak havoc in the US. How can we escape it, when everything the FED has done to support our major banks has been invested for their own gain. The very thought of a politically acceptable bailour for these nefarious behemoths is beyond the pale. That action, in the event of fiancial collapse, would seal the deal on revolution.

  2. Bayard: The difference is that the US institutions are fundamentally sound, while the European institutions are the problem, causing crisis after crisis. They are utterly unsound, created out of and at the time of the most profound, innumerate ignorance of economics. US Congressional gridlock at least won’t do damage, and doing nothing, automatic stabilizers may be enough to slowly heal the real economy.
    The US doesn’t need and won’t have a rescue plan for its bonds. In a crisis, their interest rates would go down. Everybody would want them. There could be and probably will be another financial crisis, perhaps stemming from Europe.
    But the Fed can create dollars at will. This can and might operate again to cement the claims that the Plutonomy has on the wealth of society, maintain the stranglehold of giant, insolvent, Too-Big-To-Fail bankster banks, but it will prevent a Great Depression crisis, bank failures, ordinary people’s savings wiped out. Europe’s institutions and institutionalized ignorance exacerbate all problems, even ones not originally caused by them. Reasonable, even necessary actions are made illicit, while destructive ones are mandatory. But even the present corrupt and stupid management of the US’s institutions laboring on behalf of the plutonomy will not destroy the real economy, not suppress real economic activity, the way that is happening in Europe.

  3. does the “non-financial” in “non-financial private debt ratio” mean non-financial firms? corporations, households, etc?

  4. Syudentee, FWIW i think one usually divides the private sector into intermnal and foreign. Internal private sector then into households and firms. Firms are further divided into financial and non-financial.

    See eg. here: (bottom graph)
    (“business” would be the “non financial firms”)

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  7. Hi Marshall
    Thanks for some thoughtful and interesting analysis of Spain’s situation. You inspired me to look further for some insight into Spain’s economic position and take a look at this on her housing market.

    “What about Spain’s housing market?

    It would appear that the drumbeat of trouble and price falls continues here too. Take a look at the latest numbers from Spain’s statistics agency.

    The average value of the mortgages constituted in February decreases 12.5% in the interannual rate and stands at 112,179 euros

    The value of the mortgages constituted on urban properties was 4,615 million euros in February, indicating an interannual decrease of 50.1%.

    And here is something that you may not have expected after reading about the trillion Euros of liquidity provided by the European Central Bank in recent months to help credit conditions in the Euro area.

    Mortgage interest rates

    The average interest rate in February 2012 was 4.35%, indicating a 17.3% increase in the interannual rate, and a decrease of 1.6% as compared with January 2012.

    Yes mortgage finance is more expensive than a year ago and any “LTRO effect” has been very small in comparison.”

    Looking at his analysis and yours it is quite plain that Sapin is on a downwards spiral right now.

  8. Terrific Post Marshall. I’ll be quoting it over the next two weeks in a series I’m planning. Btw, time to start attacking Peterson again, His Fiscal Summit 2012 is scheduled for May 15.

    For other commenters, don’t forget using PPCS for revenue closing the gap between taxes and spending. The US Mint, with the involuntary assistance of the Fed can also create money. See:

  9. Crisis at last will be resolve it and in general people will learn something good out of it, Spain is a strong country with thousands of years History, they survived a civil war and fought a 800 years war against the Muslins that invaded half of spain so don`t you think suck a strong people will survive and progress? just give them some time and they`ll find a way out of it, they`ll have to fix all the problems they are facing rightnow and hopefully it won`t take another 800 years jajajaja, i have faith in my own people.

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  12. Marshall, I agree with your throughts that Hollande could really bring a change to the austerity obsession. I’d be interested in your opinion on how the markets would likely react should Euro politicians really start to relax the austerity drive. Clearly this would mean higher deficits in nations like Spain in the short term. Would markets see this as good news as it helps improve economic conditions in the medium-term? or do they see it as bad news as it increases debt levels in the short term and makes the sustainability of debt all the more unclear.

    Of course, I respect the “ideal” situation would be for the relaxation of spending cuts combined with a pledge by the ECB to act as lender of last resort in some way, although I’m really not sure whether this is very likely.

  13. Abraham Vela

    I have to disagree with Richard’s May 1st Reply. History matters, of course. No one denies that Spanish people have gone through a lot in the past and the have eventually come out standing stronger. But two points must be stressed, Today’s trouble in the Spanish economy is the resutl of past decisions, not only from an external shock originated in the Subprime crises. Excessive risk taking, the real state boom, the credit bubble fed by the unsupervised and unregulated “Cajas de Ahorro” by and so on. Third, Spanish does not appear to be doing its homework to restore market confidence. In fact, it appears to late to amend the situation so that Spain is on the brick of collapse. This is no an almost sure event. A disaster waiting to happen. Yes, once the collapse busts the Spanish economy can only go one way: a path of recovery. But this may be a difficult, time-consuming and costly process both in economic and social terms. Certainly, Spain will not disappear. I have faith on Spanish citizens and wish the best. But there is no room for complacency. Painful actions must be taken now and hasrh policies will have to be implemented once spain entres default.