Spanish Protests, German Prescriptions

Demonstrators have been filling streets of southern Europe’s capitals in numbers too large for politicians to safely ignore, protesting latest economic austerity measures. Hundreds of thousands have turned out in Lisbon, Madrid and Athens, and more such protests are likely in coming days. Public’s patience is running out on austerity policies demanded by the German government and European Union leaders, which have conspicuously failed in their stated goal of reducing debt burdens and paving way for economic revival. Instead, it’s clear that these measures will accelerate depression-levels of unemployment and damage social safety net programs when they are most needed. Spotlight is now on Spain, where Prime Minister Rajoy is struggling to make new budget cuts, without provoking further explosions of anger at home and fueling secessionist talk in restive regions like Catalonia, country’s economic powerhouse. But the harsh mix of new public service cuts, pay freezes and tax increases that Mr. Rajoy announced last week will almost certainly make both political and economic situations worse. Experts now forecast a second straight year of negative growth in Spain for 2013, while unemployment, at more than 25%, is more than double the European Union average. Yet unless Spain goes through with those self-defeating measures or the Spanish economy miraculously produces new tax revenues to meet unrealistic budget targets, Germany threatens to hold up a desperately needed new European banking union that would help recapitalize foundering Spanish banks. Unlike Greece and Portugal, Spain has, so far, avoided a formal E.U. bailout. That gives it a little more freedom to set its own economic course. But Rajoy is not really a free actor. Without German approval for European banking union, Spain, could soon be forced into a binding debt bailout deal. Spain’s current debt problems are not the result of profligate government spending during the boom years. They came from abrupt collapse of a reckless housing bubble in private sector, fueled by artificially cheap credit. The bursting of that bubble wiped out millions of Spanish jobs, dragging down tax revenues, consumer spending. It forced government to pledge billions of euros that it did not have and could no longer raise to rescue its tottering banking system. New cuts to remaining jobs and spending power will not bring recovery. It would only bring further misery and turmoil. Mr. Rajoy also wants to rein in spending by Spain’s 17 regional governments, which pay a large share of education+health care costs. Regional governments squandered billions on wasteful public-works projects during boom years. But that money is lost, and health and education should not be subject to big cuts even in hard times. Nor is a deep recession the right time to tackle the long-term problem of pension costs and the demographics of aging population. With unemployment benefits ending for many of long-term unemployed, pension payments are the main remaining source of income for hundreds of thousands of extended families. There are no easy places left for Mr. Rajoy to cut services or spending without risking social disaster. Story is much the same in Greece and Portugal. Time is running out. Only a sharp change in economic policies can save euro. European leaders, most of all Merkel of Germany, need to recognize that returning the eurozone to solvency will require renewed efforts to encourage economic growth through less rigid budget targets, not continued austerity imposed on desperate governments by Berlin and Brussels. (source: Editorial – NYTimes – 02/10/2012) 


Acerca de ignaciocovelo
Consultor Internacional

One Response to Spanish Protests, German Prescriptions

  1. Professor Uziel Nogueira says: According to the NYT Editorial ” Time is running out. Only a sharp change in economic policies can save the euro.” Is that so? It sounds dramatic, like the lyrics of Smokey in the Water by Deep Purple. Reality is more complicated. Neither a sharp change in economic policy nor a loss of the euro is going to happen. The euro is irreversible but the composition of its current 17 members countries will change. The common currency is a monetary engineering experiment that went wrong. Basically, the countries under severe debt duress were not ready to join the euro zone. The initial mistake made by Germany in accepting unfit countries cannot be corrected overnight for two reasons. First, the debt crisis cannot be resolved by the ECB printing money for nothing like the FED is doing in the US. The reason is simple. The common currency is not sustained by a political and fiscal integration. The United States of Europe is just a dream. Second, the euro zone debt problem cannot be solved by stimulating additional public spending in Greece and Spain. The financial markets are no longer willing to lend to those countries at sustainable interest rates.

    The euro zone crisis presents the most serious challenge to Europe’s integration process. The economic-debt crisis has no short term solution. How long does the political system can withstand social unrest in the streets of Athens, Madrid and, eventually Rome?


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