Editor’s note: This article was first published in April 2012, as an opinion piece at the height of the eurozone debt crisis; its 23% unemployment, bailout thresholds and planned €37 billion of cuts are from then. Spain went on to request European assistance for its banking sector in June 2012.
Although it seemed that the spectre of a possible bailout for Spain had faded, the truth is that, given the country’s delicate situation, any turbulence sends the risk premium (the spread between Spanish and German government bond yields) soaring and brings back the fear of a possible bailout. Once again we hear expert economists putting forward their theories, filling the average citizen’s head with figure after figure and even using the kind of language that is rarely understood.
I imagine you’ve all heard that Spain isn’t in danger until the risk premium passes 500 basis points and bond yields pass 7%. Once those two figures are reached, Spain would be in danger, because those were the figures that led to the bailouts of Greece, Portugal and Ireland. However, earlier this very year Italy’s risk premium reached 527 points, with yields above 7%. Yet the bailout plan was never activated. Why?
Quite simply, because Italy, like Spain, is too big an economy, and a bailout is unfeasible (technically unfeasible and economically impossible for the eurozone economy).
The figure that really matters
The most important figure for countries’ economies in general, and for Spain’s in particular, is not 500 (the risk premium) or 7% (the bond yield). The figure that matters is 23% (UNEMPLOYMENT).
A country with a 23% unemployment rate cannot be considered a developed country. In fact, we could meet the deficit target thanks to a policy of cuts, adjustments, austerity and so on and so forth… but what investor would put money into an economy that meets its deficit target and has an economically third-world population?
That 23%, together with missing the deficit target, has meant that in less than 12 months more than €115 billion of investors’ money has “fled” Spain, according to sources in the financial system.
Spain’s failed hope
While the Socialist Party (PSOE) was in government, the markets didn’t trust that Spain’s economy would recover, although they hoped confidence would return with a change of government. A serious mistake, because that 23%, far from improving, will keep rising. Every adjustment (necessary for the markets) and every cut (necessary to meet the deficit target) leads logically to an increase in the 23% (which has to come down for the economy to grow).
A serious mistake by Spaniards, and a serious mistake by the analysts who politicized the economic situation, because no political party will be able to meet its commitments to the markets and the needs of its citizens at the same time, at least not in the next four years.
Perhaps some economics graduate from a prestigious university should speak plainly and say it: you can’t reduce the deficit and create jobs. You can’t cut spending and create jobs. You can’t raise taxes and increase consumption.
And most importantly, you can’t pursue a policy that destroys jobs without having a plan to create them, because the more we talk about austerity in times of crisis, the closer we get to a situation like Greece’s, except that we couldn’t be rescued.
Where will the policy of cuts lead Spain?
Stunned. That’s how I feel when I hear that 37,000 million euros are going to be cut this year. A figure that’s hard for Spaniards to bear while electricity and water bills rise and taxes go up. According to the economist Santiago Niño Becerra, another 25,000 million euros would need to be cut in 2013. That makes a total of 65,000 million euros, a figure Spain couldn’t bear (or at least Spaniards couldn’t).
When that moment comes, I’ll have to agree with Niño Becerra once again: Spain wouldn’t be bailed out, but the banks and some regions would probably be taken over by the authorities, a situation that shouldn’t happen and that should be avoided by every possible means.
Featured image: BolsamaniaTV (youtube), CC BY 3.0, via Wikimedia Commons.
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