Bracing for Bailouts Which EU Problem Child Will Be Next?

A general strike in Spain in September: Will the euro rescue package be enough in the end?
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A general strike in Spain in September: Will the euro rescue package be enough in the end?

By Ferry Batzoglou, Michael Braun, , , and

Part 4: Spain - Litmus test for Europe's Rescue System


At first glance, Spain's financial situation is deceptive. Its public debt looks rather small compared to other EU countries, at just 53 percent of gross domestic product. According to the Maastricht Treaty, government debt is allowed to be up to 60 percent of GDP. Countries such as Ireland and Germany have significantly higher debt levels, at 65 percent and 75 percent of GDP respectively.

Nevertheless, Spain is in the middle of a serious crisis. The reason is the high level of unemployment, and the massive collapse in property values.

The financial crisis brought an abrupt end to a construction boom that had lasted for years and which had been largely financed by loans. Hundreds of thousands of Spaniards lost their homes, while 1.2 million found themselves out of work. Bad loans totaling €180 billion still place a burden on the country's financial institutions today, with half the loans being held by the savings banks, the cajas. The country plunged into a deep recession.

Since the spring, the government has been trying to forcefully fight the crisis, partially as the result of pressure from the European Union and the International Monetary Fund. Prime Minister José Luis Rodríguez Zapatero introduced an austerity package that goes beyond what any other country has done so far. He pushed for major reforms in the labor market, including the easing of job protections and a reduction in high severance payments.

In the next three years, the government wants to save a total of €50 billion through drastic cuts. An additional €15 billion will be slashed from the budget this year and next. To help achieve this end, the government is cutting civil servants' salaries and slashing subsidies. The goal is to reduce the budget deficit from the current 11.2 percent of GDP to under 3 percent by 2013.

An Entire Generation Dependent on Their Parents

At the same time the government is trying to increase its revenues. Back in the summer, it raised the rate of value-added tax (VAT) from 16 to 18 percent. But the Spanish reacted by immediately reducing their consumption, thereby delaying the economic recovery that was expected to follow the financial crisis even further. After a meager annualized growth rate of 0.2 percent in the second quarter of 2010, the economy stagnated completely in the third quarter.

But the Labor Ministry assumes that new jobs will only be created if growth hits at least 2 percent. And those jobs are urgently needed: The unemployment rate in Spain is at 20 percent, while among young people it is twice as high, at 40 percent. A whole generation is dependent on the support of their parents. They struggle to find jobs and get temporary contracts at best.

The next acid test will happen soon: Next year, Spain must raise €65 billion on the capital markets in order to refinance its debt. And that could turn out to be expensive. For example, on Wednesday, interest rates on Spanish 10-year government bonds rose to over 5 percent for the first time since 2002.

There is a lot at stake -- including for Germany. That is partly because German banks have lent about €134 billion to Spanish banks and companies. Another reason is the fact that the EU's €750 billion rescue fund was not designed to cope with the possible default of a large country like Spain. In other words: If Spain falls, so does the euro.

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Trojan Horace 11/28/2010
1. Bailouts
Agree with the analysis - plus talking the Euro down helps Germany's exports to the US - which need help while the US is printing an extra $60 billion every month... But if the domino effect spreads to Spain and joke will wear a bit thin. Spain is worth a great deal more of the EU's GDP than Ireland or Greece. It might be more prudent to stop the rot now
Norberto_Tyr 11/28/2010
2. The problem is not the kids but the kindergarten, ...
The problem is not the kids but the kindergarten, namely that abstract entity called European Union or Eurogarten. According to the Maastrich treaty, Eurogarten should be providing a strict diet of veggies, milk, fruit and meat to raise the kids under its care healthy and happy, but in practice the diet is full of lollies, sugar, chocolate and air stuffed ice-cream (courtesy of Margaret Thatcher to prevent melting away). I do not envy Merkel's position, even though I have confidence on her skills and analysis, this is a time to think strategically, not time to rush, the great opportunity of our times lies in a wonderful and uncommon situation, namely the chance to choose your friends. France and the UK already chose to go together as per the XX century, and it is not surprising, they are both in the slippery down path albeit with nuclear capabilities, nevertheless, how important this would be in the future is to be seen. On my part I see fresh water and food the key commodities of the XXI century in the same way oil was in the previous one; thus some ubiquitous characters have been positioning themselves accordingly since some time ago even though undetected by untrained eyes. But I am optimistic, there is a solution lying on two principles: 1- sovereignty; and 2- jurisdiction, the very principles trampled systematically for the last 50 years by the follies of the UN, IMF, World Bank, European Union, international financial system, and so forth. For instance, if I need to lend my hose to a neighbor because his house is in flames, this very act do not mean that we have to live in a communal association for the rest of our lives. With this puerile excuse we ended up with the concept of 'global village' without even noticing, even more, it is as if that concept were the result of natural evolution and not deliberate social engineering. The fact that the slogan is more greener and apparently milder now: 'global village' and not 'proletarios del mundo: unios !' is rather irrelevant, a mere historical accident, after all the plan is about universal government and universal jurisdiction, and the Eurogarten is a long step in that direction. There are other alternatives, take for instance South America, we are all Catholic countries (nominally), we all speak Spanish or Portuguese, but the carnival and the currency, and the music and art, and infinite different ways and styles of life are abysmally different in Argentina and Brazil, for instance, which does not diminish the will of the two countries to form a strong and mature regional alliance based on the two principles: sovereignty; and jurisdiction. In my view, the major evil of the XX century was the imposition of a universal pseudo culture by the most uncultured and ignorant of all nations riding a technology they were utterly incapable to develop themselves. We must avoid that at all cost. Norberto
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