Austerity will drive Spain into ECB-IMF bailout
Thanks to an overdose of austerity, it is highly likely that Spain will be pushed out of the finance markets - and into an IMF-ECB bailout programme - by the end of the year. By Aidan Regan.
The Spanish government, under the conservative Partido Popular, will impose €15bn in spending cuts and raise €12bn in tax, as part of a €27bn austerity program. The objective is to bring the budget deficit down from 8.5 to 5.8%. The cuts are spread across government departments whilst the revenue raising measures include an amnesty for tax evaders (aimed at raising €2.5bn) and a reduction in corporate tax breaks.
The purpose of this radical austerity program is to satisfy an arbitrarily imposed number from Europe. The obsession with reducing budget deficits to 3% in a context of mass unemployment (almost 25% in Spain) is not only economically illiterate but socially dangerous. European elites have refused Spain the flexibility to lift the target to 5.8% because it is wedded to an ideological framework that assumes the economic crisis can be traced to bad fiscal policy (overstretched budgets). In reality, it can be traced to the maniacs who control international finance markets, and who are now speculating against the Spanish state.
The precise increase in the Spanish budget deficit can be traced to two factors in the immediate aftermath of the financial crisis: support for banks that were overexposed to the construction boom and the introduction of a fiscal stimulus package. Both of these policy responses were necessary to avoid a full-on depression in the Spanish economy. The immediate fiscal stimulus was soon rolled back (not just in Spain but across Europe), and therefore never had the intended effect on employment. In this context, an 8.5% budget deficit is actually quite low. In a context of growth, it could easily be sustained.
The Spanish debt to GDP ratio is less than 60%. Technically it is in a much better position than the UK. Yet it is being treated like an insolvent state because the government, in effect, is issuing debt in a foreign currency. The monetary constraints of the euro have transferred the entire burden of adjustment onto national fiscal and labour market policy. The ECB (quite unlike the Bank of England) treats the Spanish state as a foe, not a friend. The biggest beneficiaries of the euro are Germany, Netherlands and Finland, and yet these governments fully support the imposed Spanish austerity.
European elites and the Spanish Prime Minister, Mariano Rajoy, will argue that the budget cuts are necessary to bring down the bond yields on Spanish debt. Hence, to avoid Spain’s entry into the European financial rescue fund (the European stability mechanism), they must act fast and aggressively to cut the deficit. This is precisely what Ireland did and ended up in the hands of the IMF-ECB-EU Commission (the Troika). If the past three years have taught us anything it is that continued austerity does not bring down the interest rate on government debt. It simply drives the country into a deflationary spiral.
The reality is that the austerity package in Spain will make the country’s economic problems worse not better. It will choke off economic growth, as GDP will further contract. This will make the servicing of the debt more expensive. Unemployment will increase, which will put additional strain on the fiscal resources of the state. Furthermore, it will make a minimal difference to the budget deficit or the price of government bonds. More importantly, it has the potential to destroy the social fabric of Spanish society. No country can sustain that level of unemployment without conflict.
I am always reluctant to make ‘predictions’ about the economic world but it is highly probable that Spain will be pushed out of the finance markets by the end of this year. This will not be because of too little austerity, but because of too much austerity. To satisfy a crude accounting exercise, European policymakers and the Partido Popular will have pushed Spain into the hands of an IMF-ECB bailout programme (it is too big an economy for the newly established European Stability Mechanism to handle), with unforseen consequences for the rest of Euroland. The ECB might pre-empt this situation and directly buy up Spanish government debt. If they do, the German state will be infuriated. But it won’t stop the austerity brigade from imposing their failed ideology on European citizens. {jathumbnailoff}
Image top (Mariano Rajoy): PPYCL