Tuesday, June 08, 2010

Got A Deficit Problem? Call Mariano

The Spanish government has been up before a higher tier of unaccountable government this week, as the European Union examines the austerity measures adopted by Zapatero's government. So far so good seems to be the verdict, but it's still not enough to please the EU. Meanwhile there was a national public sector strike today in protest against the wage cuts, which seems to have had variable success. People are not happy with the government's measures, but there is a lack of leadership and a lot of understandable confusion amongst teachers and nurses who don't understand how they managed to be responsible for the economic crisis. It just goes to show that a government of the left is almost always more successful in pushing through cuts, in the same way as a right wing government is more likely to get away with handing over territory to another country. Should the need arise.

The EU seems to be insisting on the labour market reform as a fundamental step, even though few observers seem to really believe it will have much effect in the current situation. I will of course be expecting an economic miracle boom once it is passed, no excuses accepted given that we have been told so often it is the only thing that matters in terms of economic recovery. The reform will be announced next week regardless of whether employers and unions have reached agreement, and it seems that both sides almost prefer the government to go it alone on this issue anyway. The unions will probably then call a token general strike which will also get variable support. Spain's union leaders are not about to surrender the possibilities of having their feet under the table in Moncloa, if the alternative is to be walking the streets with their members every day.

Anyway, perhaps all of this is unnecessary? If we believe Partido Popular leader Mariano Rajoy then the way to deal with a budget deficit is easy; you make it illegal. Then you promise big tax cuts! Insane, you might be thinking. That just shows you have little grasp of modern economics. There they are, governments all over the world trying to grapple with budget deficits and the answer is in front of them. Apparently, there was something of a split in the PP about whether to vote against the government's package last week or to abstain. The government only won by one vote because the Catalan nationalists of CiU abstained. The PP knew that the government could have been defeated and that the consequences of this would have been quite dramatic. It shows more than anything else that the PP will never put any other consideration above that of recovering power for themselves. Never mind the economy, there is an urgent need to deal with some anti-corruption investigations. Presumably Madrid's PP mayor is allowed to pursue his own policy on budget deficits?

Nothing that is done seems to change the reaction of the all powerful markets, despite the fact that each increase in the cost of Spain's debt is explained in terms of the country not having adopted the very mesures that are being taken. Although the story has changed recently, countries now get their credit ratings revised downwards because of the likely effects of taking the very same measures that the markets have clamoured for. I really need some evidence to convince me that the financial markets would like to see an economic recovery, because this sort of Catch 22 behaviour suggests more than anything else that they are enjoying the crisis. Why wouldn't they, given the amount of money that has been handed out to them?

Some governments are also enjoying the crisis. Nobody seriously believes that Cameron is sad about the prospect of making massive cuts in the UK. The Conservatives lost support before the election precisely because they were unable to hide their obvious enthusiasm for such a prospect, to be followed no doubt by a tax cutting programme for the next election. Now it seems that the EU's economic hardliners want to move the deficit ceiling for national budgets below its current 3%. Apart from moving the goal posts further back when most countries haven't even got near the half-way line this is just Rajoyonomics; it makes no sense at all. Putting it at 5% for the next 5 years would be a small step towards sanity. But of course the markets wouldn't approve as it smacks too much of a sneaky attempt to get out of recession.

Almost all measures being advocated at the moment fly directly in the face of economic recovery. I mean of course for the vast majority of us who don't make their living out of trading bonds or shares. You feel sometimes like saying "Helloooo, can you see us?". Those who currently control our destiny have nothing to offer most people except a continuing decline in living standards. If those behind the current measures seriously believe they will make things better, then why so much alarm over who will pay for pensions in 20 years time? What doesn't kill you makes you stronger and just put those who don't survive in a neat pile at the back. At the very minimum it calls for a Roosevelt type figure, but there isn't even a sign of a new FDR emerging to (re)teach us the lessons that were already so painfully learnt 80 years ago.


Pueblo girl said...

I can't believe that people, governments, whatever, are falling for it. We're being pushed into taking precisely the measures that will turn this "crisis" into an everyday state of affairs. To the benefit of a few powerful movers.

Lavengro said...

The PP are desperate to get back. They're running out of new suits.

Andrew said...

I would agree that Rajoy's economics are at least as bad as Zapateros. To compare the present crisis to the 1929 slump misses one big factor. Then the world was broke - today it ain't. World growth this year will be over 4% - its Europe and the US that have the borrowing problem. Digging holes and filling them again is a worthwhile strategy short-term to avoid an even deeper recession but it ain't a medium term strategy let alone a long term one.
Would you lend me €1m for 10 years to spend on my early retirement - I'll pay you 5% p.a interest and may be I'll pay back the capital - but maybe not in euros, would pesetas or drachma do? Oh, and by the way my sons and daughters will be retiring soon.
I first came to Spain in the early 1980s and was involved, with others, in creating wealth here through investment and technology transfer. I was a 'salaryman' and didn't personally benefit by the way. I then came to live here and saw a massive improvement in living standards over 20 years. But I did not see enough effort to use this opportunity to become more productive and competitive.
Perhaps, like other tired europeans a kick up the arse is what is needed. I don't want to leave my grandchildren the buren of paying for my profligacy.
p.s Come back Moscow!!cons

Graeme said...

Yes of course it's true to say that there is growth elsewhere in the world Andrew. My question, at the risk of opening issues we've already debated, is whether any of that growth could possibly be attributed to the kinds of policies now being imposed on Spain and other countries? Several of the Asian countries have only recently got over their own dose of medicine following the crisis of the 1990's. Even the IMF and the markets now get alarmed at the consequences of their own remedies.

Sure, digging and filling in holes may not be the best long term strategy, but it sure as hell looks better than having people sitting at home doing nothing and steadily getting poorer. The problem in our case is that the economic doctors are getting very handsomely paid regardless of whether their cure is worse than the illness. Another 10 years of recession is not going to be a kick up the arse, it will just ensure that more of the potentially productive economy gets lost. Every financial crisis we go through takes a chunk of the "real" economy with it.

Also, artificially prolonging the recession in Europe and the States will have a serious effect on those parts of the world economy that are still growing. Does the doctor care? It seems not. Leaving our economic destiny in the hands of morons who say things like "I don't get paid to think about countries" is a really bad idea. Leaving it in the hands of anyone who doesn't think until they get paid is a bad idea.