Mario vs. Mariano Could Mean the End of Spain

By Marshall Auerback

The real weak link now in the Eurozone is Spain, where the data is a disaster. It is Greece writ large. And this is before Madrid, under Prime Minister Mariano Rajoy, has submitted to a new ECB program of agreed austerity in exchange for the ECB backstopping the nation’s bonds via a renewed Securities Market Program (SMP).

One can readily understand Mariano Rajoy’s reluctance to place Spain in the 21st century equivalent of a Victorian debtor’s prison. The country’s economy is a disaster. They just had 1.5 million people take to the street in Catalonia out of a total population of 7.5 millions.

Spain is still a relative young democracy. And today it is beginning literally to fray at the edges. It starts in Catalonia. Up until the EU was formed, it was clear that the Spanish military would fight and fight hard and that no one in Europe would held a seceding Catalonia. The choice for Autonomy was rational—but it’s always been a Trojan horse for eventual secession. Would the EU accept Castilio-Spanish military action, or intervene to ‘stop the violence’ in the diplomatic sense? The Spanish military is scarcely in a state for a prolonged action. Civil disobedience  unlike the charry fringe insurgency of the Basques, has great potential there.

Being thrown out of the EU would be a boon for Catalonia if it meant severance from the euro straitjacket, but disastrous for Spain for let’s face it: Spain has milked Catalonia dry for four hundred years. Recovering fiscal control would make Catalonia one of the most prosperous regions of the EU over the long term. It is, has been, and always will be in Catalonia’s interests to dump Spain

Catalonia is a VERY wealthy region. It has been a net contributor to the Spanish federation for a long time. The region has a very pronounced sense of nationhood already. The people of Catalonia don’t think of themselves as Spaniards. They are Catalonians first. The lingua franca down there is Catalan, not Spanish. You haven’t, in other words, had 200 plus years of national consciousness the way you have in the US. It is more like the US in the early to mid-19th century, where the South had a decidedly different sense of nationhood than the north. Slavery was the ultimate proximate cause for a civil war. Here it might be externally driven by Draghi’s OMT program, through the agency of Rajoy. That is why he is so reluctant to submit to the program. He probably understands the risk.

If and when Rajoy submits to the ECB’s program, don’t be surprised if separatist sentiment in Catalonia hardens and spreads to other regions. The Basque separatist problem was there for years and has only recent subsided (but is certainly not extinguished). A potential change is always fretted over with the sheep huddling in the middle clutching their wallets, but a real program for severance met with violence from Madrid will make those hovering choose sides, Should that come—don’t doubt Catalans will choose Catalonia. Spanish bluster is extremely ill-advised; now is the time for concessions, but they won’t be made. When Catalans take their money out of Madrileño banks and stop transferring taxes, then push will come to shove.

Sounds far-fetched?  Well, a resolution, on the right of the Catalan people to cut off ties with the Spanish state, will be voted on Thursday by the regional parliament. This statement of “the will of Catalan people to vote on the bond with the State of Spain” opens the way for forthcoming elections on November 25 to become a referendum on the sovereignty of Catalonia. In shades of the pre-Civil War America, the Spanish military are not taking this threat lying down, implying military intervention to prevent secession, according to El Economista.

Even without this mounting political train wreck, last week Bloomberg reported Spanish bank deposits declined by 224 billion euros or 10% in the twelve months ending July 31st. That is equal to more than 20% of Spanish GDP. When I started to warn about Spain as “the elephant in the room” last autumn, I could not have imagined a deposit contraction of this magnitude.

Spanish banking system borrowings from the ECB rose from 82 billion euros to 412 billion euros in the twelve months through August of this year, according to the Bank of Spain. Once again this amounts to lender of last resort financing equal to over 30% of GDP in a mere year. This is also unimaginable.

There can be no doubt that the run on Spanish banks has been ongoing, massive, and most likely devastating.

Spanish real estate prices have been falling for years. Retail sales are collapsing from very depressed levels. Likewise with industrial sales. Total employment has been crashing. Spain’s employment has been falling steadily year on year at a roughly 3.3% annual rate. That is equivalent to a 600,000 monthly fall in the U.S.

We all agree that would translate into something like a 4% or 5% or 6% rate of GDP contraction.  Understandably, given this dismal level of economic activity Spain recorded a fiscal deficit of 8.56% of GDP in the first half  of this year.

No wonder Rajoy doesn’t want to submit to the barbarism of the ECB’s programs. If you loved what was happening in Athens, just wait until this show moves full steam ahead into Madrid. It could make Greece seem like a harmless side-show in comparison.

26 responses to “Mario vs. Mariano Could Mean the End of Spain

  1. I was born in the the Basque Country. Half of my family are from Madrid, and the other half from there. My wife is from Madrid, but her family is a mixture of Murcians and Castillian. The same story goes here for almost anyone, not only in Madrid, but also in Barcelona, where the inmigration during the 60s from other regions of Spain was enormous. For instance, a sort of southern music “rumba” was created in Catalonia called “Rumba Catalana” (search Oh my loving featuring the Beattles). Statements suchs as:

    “The people of Catalonia don’t think of themselves as Spaniards. They are Catalonians first”

    As overly simplistic. Not everybody there feels like that. Moreover, the contribution form Catalonia to the Spanish politics have been enormous. For instance, the “peseta” was an invention from a Catalan politician, it was the diminutive in catalan for “peso”. Francisco Pi y Margall, was a politician renowed by his contribution to Spanish politics and to modernization of the Spanish country.

    “Spanish military are not taking this threat lying down, implying military intervention to prevent secession, according to El Economista”

    The have to since our constitution has an specific mandate about it “misión garantizar la soberanía e independencia de España, defender su integridad territorial y el ordenamiento constitucional”. In my opinion, that’s a mistake but that’s another issue.

    “Spain has milked Catalonia dry for four hundred years. Recovering fiscal control would make Catalonia one of the most prosperous regions of the EU over the long term”

    Again, this is not the whole truth. Portugal, with far more power in the past, is now under dire circumstances. The rest of Spain has also contributed via emigration and human resources during this period.

    In my opinion, it’s almost impossible that Germany would allow Catalonia to become independent if that means that their banks will not get their money back. It’s hard to imagine a process whereby Catalonia separates from Spain and inmediately joined the EU, with a new currency. The rich people the won’t allow to face loses, whatsoever.

    In my opinion, the real reason underlying all this, is the result of a planned policy by the CIU goverment to hide the desastrous austerity policies that have caused, as expected, so much pain there. Now, they embrace the independent flag (estelada) as if this were the solution. But in the end, they will come to terms with Madrid.

  2. The Dork of Cork

    I Disagree , sure the Catalans do better food and stuff but that does not make them a viable national economy.

    The problem for all the PIigs is the export of enormous amounts of hard $ currency to pay for oil imports.

    Only the use of a national currency and a national economy can stop this bleeding…..hanging on to the failed European market state is not very wise.
    Spain did infact engage in some internal productive capacity creation as well as Housing and road junk.

    3~ million people fly on the air shuttle from Madrid to Barcelona despite the creation of a high speed line because they use the Euro $ proxy.
    This would not be the case under the peseta
    The only mechanism to restore rational domestic demand and investment is a national currency.

    I sympathise with the Catalans and all but whatever about Europe being integrated with Europe or not they sure are integrated with Spain and indeed France.

    Recent Balance of trade data show rising exports to Germany and declining exports to France – this does not make any rational sense from a political economic / geographical perspective.
    Catalonia has also a claim on France ….. what next the breakup of the French Nation state so that we can have a happy clappy European market state .
    No thanks.

  3. The Dork of Cork

    Correction : “whatever about CATALONIA being integrated with Europe or not they sure are integrated with Spain and indeed France AND PERHAPS ITALY.”

    But what is any part of Spain doing increasing its exports to Germany !!!
    Just because they (Germany) happen to have Euro money tokens at the moment.


    These Crazy Euro trade patterns must stop – this extreme long distance trade caused by the use of a reserve currency withen national bounderies must stop.
    All domestic commerce and trade is coming to a full stop to faciatate these very wasteful cross border trade patterns.
    So much domestic demand /wages is being lost in the energy ether.

    This is obviously a very deep plan by some very powerful forces to disrupt the workings of 400~ year old nation states from the bottom up.

  4. The Dork of Cork

    @Aitor is correct.
    Spain is a complicated place or at least it was before 1986 and the Euros almost complete credit destruction of its people , landscape and traditions.
    This village was not 100 % Basque ….it held cultural / architectural baggage from other areas also.ía

    A very strange but pleasant place…………on one of those cultural / geographical tectonic plates.
    (different spelling of town – Otsagabia etc)

  5. What a bad information you have. During Franco’s Regime, every time he was to Barcelona, thousand of people in the streets waiving hands and flags. They got a lot of money for there industry from all the spaniards. After civil war, thousands of other spaniards went there to work in the industry. Cataluña is what it is with the help of many other spaniards and many foreing industries for the phisical situation and a big port. The money investment was money from the other spaniards as we did not get a Marshall plan. The same happen to Germany with the spanish workers and in some a way France. Cataluña belongs to Spain since 1492 when a joung couple joinned Castilla and Aragon. What happen in Cataluña is new in the last 30 years due to the unfortunately ‘autonomías state’ something not a one central state nor a federal state. Would you understand a high fight against your central goverment from California or whatever state ?. I cannot imagine such an action. What happen in Spain is that there are a lot of corruption. Catalan people can be free but the land belongs to spain and we are not going to give them the land as in Cataluña live 1 or 2 million independent people out of 7 million and if independence happen, most of them will fly away and more morocan people will come to live in(Now quite a lot and for the moment with not the problems of France, but who knows…). So two people could live in Cataluña: The catalans and the arabs but this is not going to be tolerated by the whole spanish people.

    • Answering to Smith. First of all I am catalan. There is a sentence in your comment that apart of all the economic or political reasons which can justify (or not) the independence, explains why catalan people wants to be independent: “Catalonia belongs to Spain since…” you haven´t said that Catalonia is a part of Spain, you have said it as if it was a property.
      Anothe sentence “Catalan people can be free but the land belongs to spain and we are not going to give them the land …” Ehem… let say it clearly, why are we called Catalans? I supose it is because we live in Catalonia and were born here or because some of us wanted to emigrate to Catalonia and stayed here because they like it, so the land is not ours it is yours and perhaps you live outside Catalonia.
      Lastly, “as in Cataluña live 1 or 2 million independent people out of 7 million and if independence happen, most of them will fly away and more morocan people will come to live in” ; 2 millions out of 7 is a minority , so you don´t have to fear anything, if the numbers are as you think there won´t be any independence at all , but I think you have mistaken the people that went to the demostration with all the independist that exist in Catalonia, if you are so sure let a referendum being make and if you believe in democracy you will accept the result.

  6. Marshall:

    I live in the Basque province of Gipuzkoa. The local government of my province is fiscally sovereign and is governed by the pro-independence and left-wing party BILDU. So what? What heterodox measures have adopted during this year and half in office? None. They can not. Godley said it best, or you forgot it Marshall?

    “Local Authorities possess none of the instruments of macro-economic policy, political Their choice is confined to matters of emphasis Relatively minor – a bit more education here, a bit less Infrastructure there.”

    This website has continuously promoted the need for a union of fiscal and monetary sovereignty. I support the right of self-determination, but I think that talk of independence within the European Union (and Euroarea) as is advocated by the pro independence Catalan parties (at least the big one CiU) are pure artificial fires.


    • In fact, in my blog, not so long ago, we were discussing about the feasability of introducing an alternativa currency there, since they already manage the taxes. It does not seem to be the case at all.

  7. The Dork of Cork

    The Greek central bank is very upfront about the problem (perhaps because it is the most dramatic example)

    Every month they publish their trade balance with the net oil and ships shown quite clearly….no Bullshit as far as I can tell.

    The all important Greek oil balance remains the same more or less….as a non national economy it must destroy its internal capital & domestic demand to maintain the dominance of external capital……which seems sacred for some reason.

    Greek Oil balance Jan – July
    Y2010 : 5,467.4 million euros
    Y2011 : 6,675.2 Million euros
    Y2012 : 6,604.4 Million euros

    It is quite easy for a NATIONAL ECONOMY to reduce its oil imports if it has access to a extensive rail system.

    The Greeks have shown a current account surplus in July 2012 only by vaporising their capital stock……not even a token effort is being made to use their capital stock efficiently so as to reduce their oil imports as the Euro market state is against all state intervention that can protect its common citizens.
    This phenomenon is happening withen all of the PIigs

    This divorces people even further from the nation state which is the true goal of the Euro market state – this will make the state even weaker again so that more of the commons can be privatised….and so on and on….deeper and deeper we travel into a previously dug entropy pit.

    We are dealing with very sick openly Maltusian sect here…..they wish to create a self fulfilling prophecy of destruction and thus buy stuff on the cheap I guess.
    Currently the PIigs only function it seems is to bail out the international cartel of banks via keeping the oil price up long enough so that they can recapitalise their positions.
    Both countries and citizens act as mere conduits in this very sick non Fiat Euro system.

  8. It’s hard to believe that all this misery isn’t going to end in violence of some kind, and not just Spain.

  9. I am by no means trying to pass myself off as an expert on Spain and I respect the opinions expressed by people on this site from that great nation. I do recall when I made comments about what a disaster Spain was about 18 months ago and accused the government of lying about the data, I got similar remarks from Spanish readers, suggesting that I was completely mistaken and simply trying to bet on Spain’s break-up. My point is that the political dynamics are moving in a very dangerous direction. I see that just today, Arturo Mas, head of the Catalan government, announced today that early regional elections will take place on 25 November. In its latest communication, CiU, the centre-right nationalist ruling party in Catalonia, was mentioning the possibility to “consult the population on sovereignty”, without making it clear whether this consultation would take the form of a referendum or “merely” early elections. Imagine what happens when Prime Minister Rajoy asks for “help” from the ECB. These things have a way of moving in a very unpredictable direction, particularly when policies are imposed which give a huge chunk of the population absolutely no positive stake in a future Eurozone. As for the notion that Germany might try to prevent this…have you considered the implications of that statement? Spain is a glorious nation, but its political institutions are still relatively young and not as well entrenched as you might think. So my position might be an outlier, but I think the trajectory of Eurozone politics over the past 3 years has been to make the outlier a more plausible scenario. This country might well be the domino that causes the whole Eurozone to collapse. And, for the record, I have NO bets on a Spanish default. I own NO credit default swaps. I DO NOT speculate on human misery of this kind. So let’s keep the comments to the substance of the argument, as has been the case thus far, rather than speculating on my motives for suggesting this as a possible scenario.

    • Marshall:

      You are absolutely right about the substance. I follow you regularly and I´ve learnt a lot reading your articles and i also agree that the temperature in Spain is rising but, it doesn’t help your arguments to simplify some facts that are much more complex. The Catalan secession process that started oficially today is leadered by a political party with exactly the same ideological frame than thosee who are in Madrid (PP, PSOE) .

    • It may help to understand Señor Rajoy; he is singularly a mid-level civil servant, a clerk of simple competence in a position requiring great ability, foresight and ingenuity. The man knows what he knows and nothing more. The council he receives is no better. The empty suit icon suits remarkably. This is a beautiful example of TINA; there is no alternative proposal, there is no alternative example, there is no alternative model, there is no alternative language. Señor Rajoy is uneducated as are those who occupy heads of government positions; their expertise is PR and acting, not philosophy, reflection or understanding. Not one of these leaders is capable of withstanding the theological onslaught of the IMF, ECB or E(uropean) C(omission), a triad Mafioso of imperial economic thugs.

      Until there is a comprehensive counter to the neo- [fill in desired term] liberal agenda, this state will keep repeating like a tract from a broken record. The MMT is only a start on what revision is required to repair economic viability. A conscious effort must be made to rescue language from a reactionary Overton Window if resolution is to be found – carpe idiom, carpe diem.

  10. John O'Connell

    I find the idea of secession interesting. Regarding the US Civil War, absent the issue of slavery, I have a hard time justifying the idea of forcing, by waging war, a group of people to be governed along with another group, when they would rather govern themselves. If it were the other way around, and the North wished to secede because the South held the Presidency and had the political clout in Congress to perpetuate slavery throughout the country, wouldn’t we hold the idea of “States’ Rights” in much higher esteem? Our Declaration of Independence says that governments derive their just powers from the consent of the governed. When that consent has been withdrawn, for whatever reason, is there not then a right to independence?

    If that line of reasoning is accepted, and applied to either Spain as a member of the EU, or Catalonia as a subdivision of Spain, and the “governed” wish to secede because the lack of monetary sovereignty is causing severe distress, then is it not the obligation of the monetary sovereign to supply sufficient funds to alleviate the distress at least enough to sustain the consent of the governed? And if the government refuses, is it not the right of the people to choose their own government and monetary sovereign?

    • Just or not, the concept of a nation-state is a strong one. History has headed mostly in one direction for quite a while — consolidation, and the crushing of minorities, rather than breakup (and that includes the US). Maybe we will head the other way now. I’m not sure that is to be desired though. It can also mean chaos and conflict.

  11. Being an Asian I feel that division of long time recognised states into parts does not generally produce long term positive results. Like division of Germany with a Berlin wall did not work and eventually both the East and West Germany got united and iscomparatively more prosperous than other European countries. Hopefully Spain will tide over its financial difficulties in case left to its resources. The financial regulators should listen to the advice of IMF and other international financial institutions. The break up of the country does not seem to solve the financial problems.

    • Javed Mir: The financial institutions like the IMF & the ECB should be listened to very carefully.

      And then always, always, do the opposite. They are either insane or criminals. Their advice is always the same: Commit suicide, so we can rob your corpse.

      Breaking up or not is less important. What is important is staying with the Euro or not. The Euro is an economic doomsday machine. Marshal pays homage to Catalonia here. But I think he would agree that an independent, now-rich Catalonia, but yoked to the current ECB & Euro system – would in a generation be a welfare recipient from a rump Spain that had had the wit to sever its ties with the Euro & run itself on sound MMT, New Deal principles.

  12. @Aitor @The Dork

    I agree with both of you: it’s hard to believe a Catalonian secession from Spain could end well, and more likely than not it could turn into a tragedy.

    Artur Mas and CIU are every bit as pro-business and right-wing as Mariano Rajoy. Is there any reason to believe they would do anything better than Rajoy and PP? Moreover, the very idea behind this recent spike in enthusiasm for independence speaks badly of it: let’s abandon the ship now that it is sinking and every man for himself.

    To the French reasons to dislike the idea, I’ll add the Italian reasons. I doubt Italy would be favorable to it: the South Tirol region is also autonomous and prosperous, has a strong independentist movement, 75% of the population speak German and at least those I personally know, call themselves German.

    What I fear is that the cretin Rajoy is not reluctant per se to ask for the “bailout”. He may be just delaying to request it until after the Galician elections…

    • @Magpie.

      Exactly! For instance, Italy goverment would never tolerate an independent Catalonia, otherwise Umberto Bosi’s Liga Norte, would be in the dreamed scenario to ask for it as well. The same goes with France and Corses.

      Moreover, and taken into account the experience from the Balkans war I doubt that the US itself, given the current situation, would want to see another conflic (not to mention war in Spain).


      It was not my intention to be rude, but just to clarify and to add a more broader perspective about a really complex issue in Spain. Something that we have not yet resolved, but something that not even Canada o the UK has not resolved either. As @DkN says, I personally have learned a lot about your insights for the Euro crisis, and it’s a plausible scenario if the current goverment doesn’t handle properly the situation. Up to this point, that has not been the case, but I think that neither Europe (Germany), UN, or even a large portion of the Catalans would really want this to happen.

      An important remark concerning MMT. Artur Mas (neoliberal), has recently said that, “whatever may happen about this issue is going to happen INSIDE de EU”. That implays to keep the €, no Catalan lira, or new currency, or any change in macro policies. In this scenario, the real economic outlook for the people of Catalonia, would be ever worse, or really dramatic.

  13. The Dork of Cork

    The European regional policies post 1980s was not all sweetness and light.
    Its core objective was the further breakup of the nation state.
    I am not a fan of the Cromwellian like nation state that we in Ireland & Scotland was afflicted with post 1600s but certainly becoming the modern Euro market state is the 9th Circle of hell for sure.
    The Catalans will merely find themselves as living withen a smaller vassal state with a more expensive diplomatic service…..see Ireland.
    They can be a dynamic as they like ……the fate of Germany and its lack of rational internal capital creation ro mindlessly export stuff all over the gaff will prove my point “going forward” as the ass lickers in Ireland like to say.

  14. I think Marshall has a point. Centrfugal forces have been unleashed by the ECB’s intransigence, and demands for regional autonomy and independence can only increase as the crisis deepens, and not just in Spain.
    Europe increasingly relies on a growing democratic deficit to keep it’s flawed institutions on life support. It’s straight from the IMF playbook: governments must operate in ‘technocratic isolation’ to ensure fiscal rectitude. Police must be granted paramilitary powers to ensure ‘stability.’ Natonal parliaments must be subordinated to the banks and transnational institutions. Financial institutions must regin supreme.

    These policies can only work over the longer term in conditions of virtual dictatorship, and with increasing use of state violence. However, Spain and Ireland are not Brazil and Argentina in the 1980’s, and the Troika are running out of room to maneuver.

  15. The Dork of Cork

    The real problem is the UK post Big Bang of 1986.

    It has a very dramatic current account defecit.
    •The United Kingdom’s (UK) current account deficit was £20.8 billion in the second quarter of 2012, up from a revised deficit of £15.4 billion in the previous quarter.
    •The trade deficit widened to £10.1 billion in the second quarter of 2012, up from £8.1 billion in the previous quarter.
    •The income deficit widened to £5.2 billion, up from £1.9 billion in the first quarter of 2012.
    •The financial account recorded net inward investment of £11.1 billion during the second quarter of 2012.
    •The international investment position recorded UK net liabilities of £325.8 billion at the end of the second quarter of 2012
    Now that the city cannot run oil through the PIigs and get a yield off the waste production it must try to push these sad little countries into current account surplus.
    Ireland has posted its biggest current account surplus ever and even Greece acheived a current surplus in July.
    I am all in favour of Fiat currencies withen the confines of defined political borders but its the banks which provide the mechanism of final settlement….they have engineered a system where there cannot be final settlement.

    All Countries must always be a state of permanent Bankruptcy so that the city can live the life it has grown accustomed to.
    Now all cities must always be in trade defecit to their hinterland but if they cannot come up with any worthwhile ideas there is no need for cities.
    I imagine This was the reason for the Breakdown of Roman Rule.
    Eventually People embraced the Dark ages as at least they could get on with their short brutish lives.

    Thinking of investing in a Iron Age hill fort…….despite the destruction of the landscape many remain in Ireland.

    Bring on the 6 th century for a rest.

  16. I think the journalist (Marshall Auerback) is generally right about the depth of the economic disaster here in Spain, and some of the figures are very troubling, but he is almost certainly over-emphasizing the importance of the military in this country.

    Their influence has greatly reduced since the clownish 1981 attempted coup, though both they and the various police forces here can be brutal when allowed to.

    His comparisons with the American Civil War and US history are surely drawing a long bow.

    In the he final paragraph shows an almost gleeful, ghoulish delight in the economic and social misery here, when he wrote: “If you loved what was happening in Athens, just wait until this show moves full steam ahead into Madrid. It could make Greece seem like a harmless side show in comparison.”

    As is often the case with sensationalist journalism from the US, some of the comments from ordinary people underneath the article were more sensible, thoughtful and seemingly better-informed than the guy who’s getting paid to write this shock-horror stuff.

  17. Javier Touceda

    I love Marshall Auerback writing about spanish economy but when he speaks about the society i can read between lines that in Spain we call “black legend”.

    Only one example: On “the young democracy” .Before the dictatorship Spain was a democracy (parlaments and elections are not an exception in the last 200 years in spanish history) and the dictatorship only become true after three civil war years whith the support of Hitler and Mussolini and the inhibition by the democratic world.

    And so on..