Editor’s note: This article was first published in November 2012, with Mariano Rajoy as prime minister and Luis de Guindos as economy minister. The debt figures (households about 900 billion euros, public debt close to 900 billion, unemployment at 25%) are from then. Spain received a eurozone loan for its banks in 2012 but never requested a full sovereign bailout.
We all get into debt. Small businesses, listed companies, families, regional governments, town councils, the central government. And debt has to be paid, but the only ones who can pay it are families, ordinary citizens (we are the active part of the state, the ones who generate income). The public accounts (in debt) belong to all of us, and the debt from the bank bailout, which belongs to the banks, will also be paid by families, because that bailout has become part of the public debt. If any economist disagrees that the banks’ debt (whatever the government may have said) is part of the public debt, they can always go back to university.
In other words, the whole party we threw, which ended in a sovereign hangover, will fall on those who can no longer pay. Europe asks families to make an effort, and every time it grants Spain financial aid (a loan, a bailout, a Euromillions jackpot, call it what you like), the aid comes with adjustment conditions aimed at people who can’t make any more effort. As we can see, every day companies close, more people lose their jobs, loan defaults rise, people lose their homes, and so on.
The government, which claims to have good economists as advisers, starting with Mr. Luis de Guindos, probably knows that the only way for a country to grow is by increasing consumption. Since both Mariano Rajoy and Luis de Guindos went to fee-paying universities, I’ve been assured today that those universities also teach that tax rises (income tax, VAT) put the brakes on consumption. Basically, a large company (let’s take listed companies as an example) cannot adjust its profit margin these days (it can’t absorb the VAT), among other things because most IBEX 35 companies are massively in debt. And if we look at the secondary market, the situation is enough to make you cry.
Of course, listed companies enjoy certain privileges in their corporate tax, and even so, you’ll have noticed how much electricity prices have gone up. If the VAT can be absorbed, why does a listed company raise electricity prices? Simply so that families absorb those taxes.
As for small and medium-sized businesses, it’s clear that if they raise their prices, they lose sales and therefore close. If they absorb the VAT, they also close, because they would stop making money, unable to squeeze their profit margins any further. If these businesses close, someone loses their job, which in turn takes more consumers out of the market, and that leads other businesses to close, since there are fewer buyers for their products because of the loss of purchasing power. And so we’re back to square one.
At that same university, which has produced great masters who have advised both the previous government and the new one, they were also taught that a country with 25% unemployment cannot possibly produce enough to pay both the public debt and the private debt that became public. Much less is it prepared to take on, next year, the interest generated by the debt itself and the high cost of financing caused by the distrust that bad economic policy creates in Spain. It is estimated that next year Spain will pay close to €60 billion in interest on its debt alone.
The panic numbers (how much we owe)
The debt of families and citizens in general is around €900 billion (credit, loans and so on). Spanish companies’ debt exceeds a trillion euros (€1.2 trillion, to be exact), according to the Bank of Spain’s own data, and over €600 billion of that belongs to just 28 IBEX 35 companies. The financial sector’s debt also exceeds €1 trillion, and the state’s public debt is already close to €900 billion, if it hasn’t passed that mark already.
Bearing in mind that Spain’s GDP is almost €1.1 trillion, and doing some schoolroom arithmetic, the kind they do in both state and private schools, it’s more than obvious that this debt cannot be paid, as Santiago Niño Becerra told us. What’s more, at the rate we’re going, it will be a matter of very little time before Spain’s public debt alone reaches 100% of GDP. Any doubt about why people speculate against Spain?
Basically, for every €1,000 Spain collects, we spend more than €3,000. The only measures governments have taken so far, their solution, is to screw the people who pay their own debt, the state’s debt and the banks’ debt, and who swallow the price rises of companies that, logically, couldn’t absorb the VAT increase, as well as accepting a significant loss of purchasing power. That means that if we continue down this road, in 2013, far from improving, for every €1,000 Spain takes in we will spend €4,000, because consumption will slow down even further, and we will move even further away from the way out.
That’s why there is absolutely no doubt that the bailout will come. Why it hasn’t been requested yet may have a simple explanation. Perhaps the truth is that Spain hasn’t asked for the bailout yet because the government knows it will only buy us some time, the last bluff, since a bailout means more cuts, more tax rises and more debt. So it means consumption shrinking further, more unemployment and more loss of purchasing power.
More recession. And let’s see how Mariano Rajoy would explain to those he promised he wouldn’t cut their pensions that, by requesting the bailout, he will almost certainly have to touch pensions.
The solution to this problem
The truth is that there is no solution to a financial problem of this size if those responsible for this crisis keep being protected. And let no one misunderstand me: capitalism is perfectly healthy for the economy, but capitalism works thanks to the base of the pyramid, which is the middle-class consumer. If we abolish the middle class (as is happening), capitalism will be in serious trouble.
To get out of the crisis, we have to start understanding that someone will have to lose, and that someone cannot, must not, be the population, because people can’t make any more effort. You can’t force the population to pay off their own debts, plus those of listed companies, the financial system and five years of political mismanagement. Everyone has to pay for the damage from their own party.
Today we won’t get into corruption, but it would simply be sad if it weren’t so utterly pathetic that in this country the whole political structure, from top to bottom and from left to right, has figures (let’s call them criminals or crooks) involved in corruption. And this problem won’t be solved until the population itself stops being “dazed” by politics.
If at this stage, after all these years of crisis, a government can’t come up with a policy to create jobs RIGHT NOW, it’s because they must be incompetent or because they really aren’t worried about unemployment. Sometimes I have that logical feeling: first fix the deficit, and then they’ll get round to working out what to do with the unemployed. But you have to be truly inept not to realize that in this case the order of the factors does change the result, because if unemployment isn’t solved first, we will never solve the public deficit.
As I said in another article, if you gave a chimpanzee 12 glasses of wine and put it in charge of governing Spain, there would be no guarantee it would do any better, but it most certainly wouldn’t do any worse.
Featured image: Montecruz Foto from Berlin, Alemania, CC BY-SA 2.0, via Wikimedia Commons.
