Spain

http://www.schneiderfx.com/news/comments/Financial-Times-Stocks-Rebound-but-Eurozone-Tensions-Remain/1206

“Bond bears are in control of peripheral markets and there is a cruel sense of inevitability about this crisis. Only savage austerity or an extraordinary measure by the International Monetary Fund of European Central Bank will stop them.”

@Kevin O’Rourke

Wow. Good to see someone blogging here actually pinning their colours to the mast.

Given the recent changes in employment law there, one assumes the situation is going to get even worse in the next quarter. Those hot summers can cause mighty short tempers.

Does anyone know how to fix this situation or is Europe broken and it’s just going to take some time to see just how bad it really is.

Super Mario needs to wake up and stop talking about inflation in Germany as an issue. There are 16 other countries in the Euro zone. The real issue is decline and the social unrest that is brewing across Europe as people struggle more and more under the jackboot of austerity that is not curing the ills but making the patient worse.

“I don’t see any way that the Eurozone will survive in its current form….”

It’s hard to think of a good reason why we should want it to. There comes a time when even a painful cure is preferable to suffering the disease.

I’m pinning my hopes on Hans Werner Sinn. However bad his arguments, if he can persuade the Germans to abandon the project he will be doing us all a huge favour.

“Super Mario needs to wake up and stop talking about inflation in Germany as an issue.”

The ECB has to drop price stability as its sole focus . Jobs are more important. Long term unemployment is very, very expensive. Look at what happened in Moyross over 30 years.

@Kevin O’Rourke

don’t see any way that the Eurozone will survive in its current form unless the macroeconomic policy mix changes, and I’m not sure it will change, even if M Hollande gets elected.

I have always favoured attempting to escalate the crisis so as to realign German/ECB interests with the peripheries’ but the government parties in each of the peripheral countries have thrown away the various opportunities for doing so (especially in Ireland) in order to try and identify themselves with the ‘virtuous’ core EU – which is now of course reduced to Germany. So complete has been the submission of the GIPSIs that the German narrative of the European component of the global financial crisis, a fantastical self interested story of time travelling confidence fairies, is being signed into law. The EU has always been at war with inflation. Fiscal irresponsibility has always been attacking the Eurozone

This idea of somehow becoming German by doing what Germany wanted and believing what Germany believed was always a mirage, not only can no one else have Germany’s economy – even Germany could not be its current self outside of the dysfunctional variety of EMU we have.

So the peripherals divided themselves and were duly conquered. Looking into the future the political failures (eg: Lisbon) that left an unaccountable ECB and a neoliberal Germany with very closely matched interests (eg: being psychopathic monetarist blowhards) means that Eurozone policy will never again match our needs. Germany and the ECB are in control and intend to remain so, a touch of manifest destiny in their eyes.

If we can not fight German Eurozone hegemony every EZ member not sharing a border with them needs a path from their current level of integration with the EU to a more Scandinavian distance, that will involve reneging on commitments that should never have made. In our case EMU and the banking guarantee have to be unwound in a way that causes the minimum possible losses to Ireland which will mean a degree of unilateralism.

On that point the fact that the ECB and Germany’s interests are now so directly opposed to the peripherals means that EU mulitlateralism is dead and we need, if perhaps only temporarily, to move apart once more. Think of it as our Dunkirk moment.

25% unemployment is mind-boggling.

Hard to see how a (western) society functions in such a scenario.

Very very sad.

Mrs Merkel should offer to move the Champions League final back to the Bernebeu or Camp Nou as a stimulus measure.

@George

Er, kids scavenging for food in bins in Madrid in February – but being fought off by the confused looking newly released patient from a nearby mental hospital. As the taxi driver said when I pointed this out to him: “Bienvenido a la nueva España.”

Then there’s my friend’s brother in the northeast who works for some regional council and hasn’t been paid for three months.

You think I’m joking?

I was in Estonia recently. Most people there just seem to buy vodka in six-packs and go home to drown their sorrows. Didn’t see much evidence of austerity on the street.

@Jagdip Singh

“If it faced up to its true bank/property losses”

I have every faith that you are right and Spain’s property slump will follow Ireland’s trajectory. The current 8% or so impaired loans will be 14% or more by this time next year. Current bank valuations in Spain are ‘mark to fantasy’ territory.

Stiglitz agrees:

http://www.bloomberg.com/news/2012-04-26/stiglitz-says-europe-is-headed-to-suicide-on-austerity.html

Unfortunately Official Spain seem almost as deluded as Official Ireland:

http://www.bloomberg.com/news/2012-04-27/spain-to-seek-foreign-investors-to-offload-property-from-banks.html

“When asked whether the plan would create additional losses for banks, he [de Guindos] said assets are already priced at market value. “

Ah, it’s all OK.

Wolfgang Schaeuble has just been quoted as saying, “…the country had not deteriorated in objective terms.”

So that’s alright then. Nothing to see here. Move along.

@PR GUY

5.6 million people don’t matter.

If Spain hasn’t deteriorated then why the need to pile on austerity..Wolfgang is engaging in ST.

@PaulW

From your link
““The key element is going to be transparency and valuation,” said the minister, who used to run the Iberian unit of Lehman Brothers Holdings Inc. When asked whether the plan would create additional losses for banks, he said assets are already priced at market value.”

Didn’t Lehman have a funny notion of valuation…I saw something recently that they were insolvent for some time before filing for bankruptcy.
The key element is credibility and it’s not looking good.

@ Paul W

Per Joe Ryan

“Why would Spain have a monster unemployment problem regardless of ‘austerity’?”

@KO’H

Thanks for your forthright and unambiguous comment. I agree with your sentiments 100%. In particular, I believe Europe is in need of a complete policy rethink and a refutation of the current German narrative of the crisis. An important step in this regard, in my view, is a rejection of the upcoming treaty referendum.

Therefore I would be very interested to hear your opinion on the treaty and if you would advocate a yes or no vote.

I was just thinking about the next couple of years (yeah – I’m one of those ‘visionaries’).

What if 25+ % unemployment becomes the ‘new normal’ in the periphery countries by 2015 (with 50% youth unemployment)?

I wonder what that would do to ‘yer social fabric.’

Warning to Germany?

“García-Margallo draws parallel between eurozone & Titanic – when ship sank 1st class passengers also went down (not inspiring confidence)”

Specific proposal. Ease off the brakes on pay in Germany a bit more. That will stimulate every economy in Europe without needing the German government to run a deficit. It will also give us a little lift to euro area inflation that will help all the peripheral economies to regain competitiveness without hard-to-achieve nominal reductions in pay.

Germany is not sovergin either – its capital is Frankfurt.

They are almost as pathetic as the Baltics.

Its the oldest trick in the book …. the banks use one favourite “sovergin” against the others to extract the maximum yield….when all resourses are extracted they change loyalties by whispering into Kings ears.

Its merely a question of smashing the financial sector or they and their agents in each European Treasury will smash you.

Its clear where the morality of Europe lies……… the Stock of debt is superior to the stock of Humans.

“Super Mario needs to wake up and stop talking about inflation in Germany as an issue. There are 16 other countries in the Euro zone”

I don’t know what to say to that…. Mario and his crew are a bunch of satanic henchmen.
Appealing to their inner souls is not a wise move me thinks.
At best they are to be pitied & scorned.

http://www.youtube.com/watch?v=13Ymcs1lMNM

In reality they have no power over us…. it just takes a moment of awareness and action.

@ MH

I have been arguing for specific proposals for weeks, including:

The announced targeting of higher levels of inflation, say 4%, which would precipitate a booming the core and facilitate adjustment in the periphery.

The reduction of ECB interest rates to .5%, say.

Introduce banking system reform to regulate banks at a European level, including a bank resolution regime which would certainly help Spain.

Definite debt restructuring in Greece. Ireland and Portugal. In Greece and Portugal this would have to be accompanied by significant investment and dramatic structural reforms, but it would be tolerable if the benefits were clear. In Ireland a 50% write down of the prom notes would probably suffice.

All the above could be done with minimal cost to the European taxpayer. Compared with the current course which will send the Euro onto the rocks, the choice should be a no-brainer.

However, the required change of policies would mean a lot of Serious people would have to eat humble pie, so it is unlikely to happen.

Michael H,
No need for reforms or for instructions to German companies. The brake on pay in Germany has come from consensus between government, employers and unions that it should be so. The existing institutions will produce faster pay growth if government changes its stance, and the unions firm up their stance in favour of a higher wage share.

@Paulr

“…..There are 16 other countries in the Euro zone. The real issue is decline and the social unrest that is brewing across Europe ….”

+1

Spain is headed for an Argentinian type revolt where we will see hundreds of thousands marching on the streets of Madrid. Governments will fall one after the other over a period of a few months. Negotiations will take on a hard edge in Brussels and Frankfurt. The EC and the ECB will buckle. Unlike Greece, Ireland and Portugal the fall of Spain would reverberate around the globe bringing down Wall Street, London, Frankfurt, Paris and Tokyo in quick succession. This would precipitate a world wide recession as Europe freezes, China’s exports drop as Europes imports drop. The US slams the gate on imports as they did in 1932. The rest has been scripted starting in 1929, hopefully it will not take a major war to restart the major economies.

Ireland has little effect on the outcome, referendum or no referendum, voting yes or no. We can help by joining the group of nations that want to debase the Euro with Germany in or out. If Germany leaves the drop will be swift and substantial. This would not be necessary if we were capable of restoring competitiveness by the front door, that would take guts which will not magically appear in the candy shop on Kildare Street.

@ Mickey Hickey

I see you have started to distill the various ingredients and the brew is looking decidedly bittter. Mohamad el erian has said all along that Europe does not seem to realise that it needs structural reforms. It thinks it can stumble along and that growth will resume as if it were simply a cyclical recession. I take that to mean political and governance reforms. In Ireland, we had the social partners running the gaff like it was their own private fiefdom for almost two decades. Oh! I forgot they are still running the gaff giving themselves a free pass and a CP deal spanning the period from 2010 to 2014. It defies any logic and is utterly disgraceful that our government absolutely refuse to lead the country. The only policies are bailouts and MOU’s this will end badly mark my words.

Spain will be the country that tears the EZ experiment apart and Ireland will be one of the countries least prepared for the fallout. BTW youth unemployment > 50% is classified as up to 29 years of age in some parts of spain. Makes the covering up by our ESRI look almost inept.

The train bearing hard facts doesn’t stop at platforms mobbed by politicians courting the next election.

Standards of living are falling in many countries in Europe. It is inevitable that they will fall further. No political party with an eye on government will admit that.

Meanwhile politicians of all hues tuck away pensions and entitlements that would make Noah weep.

I have said this many times here but it is crazy to have so much human capital undeployed for want of a workfare program and adequate personal debt write-off procedures.

with the spanish unemployment rate hitting 24.4 % i have read somewhere that unemployment benefits run out after two years how do the long term unemployed survive in spain i hope somebody is keeping an eye on the army

i remember the eighties when a young king Juan Carlos was brought in to help face down the generals

@PR Guy

dangerous times indeed conditions are getting worse and the ostridge head is still in the sand the money policy and politics is failing people in Europe as M Hickey say`s things are eerily looking like the roaring twenties boom and the thirties depression

how many times have you heard that history has a habit repeating itself

Kevin O’Rourke

Very refreshing to see your thread here. Well said.

As you suggest, the results we see were all predictable (& predicted by heterdox economists).

Nor is the solution rocket science.

If the Euro is to survive, it must be radically redesigned. And it will only work if there is real commitment to junk the mercantilist race to the bottom agenda. We wouldn’t put up with this cr@p between regions here, sharing our national currency. We shouldn’t in the Eurozone either.

It goes without saying that the fiscal compact should be dumped in the bin along with all the other neo-classical rubbish that is both the cause of the original crisis & the ongoing mess of these last years since.

Of course, the Eurozone will blow up long before the radical reforms can be agreed. If they can be agreed, given the 2 decade in the making level of ignorance & ideological blindness near universal amongst politicians & economics ‘advisers’.

However, the attempt should be made.

Whilst we’re doing that, we must apply the only policy that can stave off the collapse & reverse the vandalism caused by the ‘austerity’ fallacy of composition stupidity.

The non-government sector cannot increase its spending to create growth. And certainly not compensate for the austerity vandalism.

So that leaves only one sector to do job – the government.

That is, stimulus funds need to be injected into the real economy. (LTROs & QE are useless for this purpose.)

Now, we have a not-fit-for-purpose (except for the top few percent ) currency union where we limited our governments’ debt capacity by 2 or 3 times (vs UK, US, Japan etc.) to facilitate price gouging by ‘markets’. So governments can’t go there for more finance.

But, collectively, we do have a (fiat, free floating) currency issuing authority which, in economics/monetary terms, can supply all we need, free of any debt or interest whatsoever. It’s called the ECB.

Probably the most effective way of applying stimulus funds to the real economy, whilst also relieving the misery of the worst affected, is to implement an MMT style Job Guarantee. Offering every unemployed person a minimum wage job in non-competing, socially useful employment.

With such high unemployment & idle productive capacity, inflation will not be a risk for some time, & at least not until we can return economic activity to pre-crisis levels.

This does two things. Gives us time to agree the needed reforms to the Euro system & if we can’t achieve that, we will all have considerably stronger economies making a return to national currencies far more orderly & less traumatic.

And if the latter occurs, we can also give up the pretence that a sovereign (free, fiat) currency monopoly government need ever ‘borrow’ a cent in order to spend.

@The Alchemist

Irrespective of the fiscal compact, the unpalatable fact is that Ireland like others has to pay its way and live within its means.

How strange those rules do not apply to the Eurozone financial sector.

The current flavour of EMU makes traditional real economy focused remedies to the European component of global financial crisis impossible so the countries not sharing a border with Germany have to choose between saving the real economy or adherence to the toxic neoliberal dogma that passes for economic thinking in German establishment/ECB circles.

That is the unpalatable fact that the collective peripheral establishment can not face. European economic multilateralism is no longer a possibility – Germany, the ECB and the political right in many German client states have interests directly opposed to those of the peripherals.

Interesting program on Italy by Neil MacDonald, covers all the bases. Note the similarities with Ireland. Of note but not mentioned in the program is that the overseas Italians have the right to vote and it is set up in Embassies, Consulates and cultural institutions. This means that the disenfranchised can voice their opinion unlike Ireland where the government is glad to get rid of them. In the TV interview Mario Monti states very clearly that there will not be a second round of austerity in Italy. His Minister responsible for pensions breaks down in tears when announcing that there will be pension cuts, Monti has to finish her announcement. Caring people Italians.

My reading is that if this round of austerity does not work they will leave the Euro and debase their currency. Italians invented bonds in Venice (1171) and Florence (1397) they also have a long established record of debasing their currency.

This places the onus on Germany to arrive at a consensus with the rest of the EZ. In a sense Monti is positioning the country in anticipation of negotiations.

Political economy and history are now more important than ever.

http://www.cbc.ca/news/world/story/2012/04/20/f-power-shift-italy.html

@ Michael Hennigan

The Italian government is heavily indebted, Italian businesses and families are in excellent shape. In Ireland the gov’t, small businesses and families are over indebted. Italian business has proved to be very resilient and creative for centuries. They now lack an influx of young workers due to the birth rate being as low as 1.2 for decades (shades of Japan). This accounts for the hundreds of thousands of Africans and Chinese in the country. First the small companies hired Chinese, then the Chinese bought the companies. The Chinese owned company exports to China are not low quality, in time the production machinery will be moved to China where production costs are lower. Illegal immigration is not a good long term business strategy. Something similar is going on in Germany where Chinese buy Mittelstand companies and continue to operate them in Germany while replicating them in China. They are not closing the German companies, Chinese are socially and politically skilled people who take a long term viewpoint.

There is a big furor in Spain about engineers emigrating to Germany. It is seen as a hollowing out of Spain and Germany’s gain, which in the short term it is. They are being hired by Mittelstand companies. In the medium to long term it means that Mittelstand know how will migrate to Spain at Germany’s expense. Underlying this is the low birth rate in Germany which is leading to problems that are already under way in Japan and Italy.

Globalisations have collapsed in the past and this one will suffer the same fate. Protectionism will rear its head and engulf the world.

In the short term Ireland has to align itself on the side of EZ countries that are willing to debase the Euro using low interest rates and QE. We are still too small to go it alone, even Germany is too small to go it alone. Hopefully tariffs will not go over 20% from the present 6%. The world still needs the EU and the EZ and in particular the inhabitants of Europe have to match the military and economic might of the Chinese, Indians, Brazilians, Americans, Russians.

Life never proceeds in a straight line and wiping out the middle class to replace it with minimum wage earners leads to civil wars or worse. The 1920s hyperinflation in Germany is an example of what should be avoided at all costs.

Italian small businesses and German small businesses are now faced with the problem that they do not have children at all or no children capable of running the family business. In the days of 4-7 child families succession was no problem. Businesses are being sold, to employees, larger businesses and foreigners.
The Italians and Irish have been emigrating in large numbers for over a century. The Germans in large numbers for limited periods after WW1 and WW2. You can enter Italian communities in Buenos Aires, Toronto, New York where you have all the comforts of home including language, radio, TV and Masses in Italian. It is easy for the Irish and Italians to emigrate and they do so at the slightest provocation. The German overseas support networks are set up by the German Gov’t and businesses to accommodate German employees abroad. German language and school programs are provided so that it is a seamless experience for the whole family. The Goethe Institut and Deutsche Schule along with numerous clubs and private schools are the mainstays. Austrians and people like myself and my wife take full advantage of the opportunities.
Small family businesses have a stabilising effect locally and nationally and are the back bone of German and Italian resiliency in down turns. At the other end of the spectrum is the MNC who will pull out after one or two unprofitable quarters and lay off after one unprofitable month. All determined by a computer far removed from the site of the crime.
In recent years Braun, Hoechst, Continental were sold, the latter for $12 Bln. The daughter now has a large horse farm in Kronberg which is positively palatial.