Spain Is Doomed: Why Austerity Is Destroying Europe

The Atlantic ^ | Apr 18 2012, 10:00 AM ET | Matthew O'Brien - Matthew O'Brien

[ctdonath2]

Let's try a thought experiment. Imagine you walked into the bank, told them you were going to be taking pay cuts for the next few years, and then asked for a loan. You'd be laughed out of the office or else pay an interest rate so high that "usurious" wouldn't do it justice. The logic is simple: If you're in debt and your income is shrinking, it's mighty hard to pay back what you already owe.

... Nearly a quarter of Spain's population is unemployed. Half of its youth are out of work. And it's only going to get worse. Spain is supposed to trim its deficit by some 5.5 percent of GDP over the next two years. That's not a recipe for growth. Just ask the IMF, which downgraded its projections for Spain's economy back in January.

What matters for a nation is its GDP. That's a country's equivalent of personal income. If Spain's GDP is set to fall for the foreseeable future -- and it is -- then who would want to lend to Spain?

[cicero2k]

Has Europe actually tried austerity or is this more socialist propaganda? I say the latter...

Austerity is not nice.

Kicking the can down the road is.

Nice always wins elections.

See California.

[ctdonath2]

Even an “incredible breakthrough in technology” isn’t going to happen fast enough; takes 6-24 months for any large-scale business model to ramp up, but once people go 3 days without food it’s over. Even meaningful cuts (the “austerity” referred to) won’t help because there’s insufficient productivity to backfill the erosion of wealth. Fork, done.

[buwaya]

The solution here is to look to non-fiscal effects of government policy.

Regulation is a hidden tax - effectively unfunded mandates. Reducing regulation is in part like a tax cut, it can act like a fiscal stimulus but without involving money.

Fiscal austerity can be combined with deregulation to work our way out of this jam.

[Paladin2]

"Just what product is it that government produces? "

Investments in growing the number of 'rat voters.

[discostu]

It’s funny how much the left doesn’t get austerity measures. There’s been a spate of stories lately about how they didn’t fix the economy, I keep reminding my friends austerity measures are about acknowledging you’re broke, not about growing the economy.

[Nervous Tick]

>> A lot of people aren’t going to survive [austerity]

Yes. That’s correct.

>> “9 meals away from revolution”.

Yes! Civil unrest, up to and including revolution, is one possible (and unpleasant) outcome.

Note on both of the above: BAD OUTCOMES ARE A DEFINITE CONSEQUENCE OF BAD BEHAVIOR. As inconvenient as that fact is, it can’t be wished away.

>> If enough value isn’t created fast enough (not printed), attrition is the remaining solution.

Yes. However, the real problem is that over the last few decades the world has largely shifted its mindset away from generating new wealth through productive endeavor, towards “making money” by speculating on increasing value in something (the something flits from real estate to equities to precious metals to junk debt to...) Just as many occupations in the speculation industry (think real estate and construction) are gone never to return, many bubbles have popped for good (I hope anyhow). Reinflating these bubbles, if it is in the cards, will only kick the can down the road.

That problem is compounded by an attitude of entitlement to various government benefits, cradle-to-grave. It’s as if every restaurant is a smorgasbord and every patron a fatty who expects to pay 99 cents for all they can eat. Unsustainable.

The economic upheaval of the ‘30s was quite different from this upheaval. Whatever Uncle Ben thinks about his vast knowledge about the Great Depression, his toolset is not appropriate for dealing with this one.

[SoCal Pubbie]

Your conclusion is the same as mine. No real recovery until some sort of new gizmos drive the market. The automobile, airplanes, radio and movies help make the Twenties Roar after the downturn right after WWI. Post war technologies including the space race drove the post war era as the world recovered from the Depression and WWII. Electronics including CDs, DVDs, and the personal computer overcame Carter’s malaise.

What will be the new invention that brings back prosperity? And will the Luddites and control freaks in the government let it happen?

[St_Thomas_Aquinas]

——Lets say you chop government in half gradually over a 6 month period. That is going to put a lot of people out of work(government workers) in an economy that cannot absorb them..-——

Think of it this way. These govt employees hinder real productivity or, at best, produce nothing of value. IOW, one quarter of their potential work force might as well be on the dole.

Cutting govt employment by 50% immediately releases 15% (?) of their people for work that is of value to the Spanish people.

Productivity and tax revenues would grow immediately, also because investment would flow in.

[Logical me]

Unless drastic turn around America is on the path to destruction. The Constitution is already an unknown document to more than half of Americans.

[ctdonath2]

Close, not quite. The point here is austerity spending at the too-late point.

Example: You finally stopped your prolific spending. The banks have backed off to give you economic breathing room. They’re not going to send the debt collector, but they’re not going to loan you any more money either. You have four mouths to feed. You have a job, but it’s two weeks ‘till payday, work is a 2-hour drive away, and the gas tank is empty.
Response: The problem isn’t that you’re on a tight budget. The problem is yer doomed.

Get ready for the collapse of Spain.

[buwaya]

Cut regulations is key.
Spain is choked on regulations.
So are we for that matter.
Deregulation is like a tax cut.

[Proud_texan]

You can't teach a Keynesian a doggone thing. You can show them the real world results of their theory and they just ignore it.

Talk about a bag of hammers.

[GonzoGOP]

Without some kind of incredible breakthrough in technology, there is not going to be a way out of this death spiral.

The spiral always ends.


The question is only if it is in a smoking hole in the ground, or if like Captain "Sully" Sullenberger you can make a controlled impact. In this metaphor the plane is the social system, the passengers the citizens of the nation involved. The plane is gone either way. You might be able to save the passengers, but if you try to stretch the glide too far you are probably going to lose both. Austerity is like putting the plane into the river while you still have enough airspeed to have some control.

[agere_contra]

Spain will leave the Euro this year, and they won’t announce the fact beforehand.

It’ll all happen in the space of one weekend. Domestic bank accounts will be re-denominated in pesetas, robbing account holders of ~30% of their wealth. There’ll be a limit on withdrawals until the new currency stabilises.

The only alternative is an unlimited bailout by Germany.

[blueunicorn6]

Why does Spain need to borrow money?

[Kratos]

Excellent post.. you are entirely right.

[ctdonath2]

Tangential thought: solve the problem by offering a free plane ticket to a random airport.

[ctdonath2]

They can’t generate enough wealth fast enough to feed everyone, so they need a loan.
Of course, nobody will loan ‘em money because feeding everyone won’t generate enough wealth to pay back the loan in any sane period.
Time to hunger being much less than time to payback, no loan, no food, bad news.

[campaignPete R-CT]

austerity? why not try prosperity. Those unemployed young people should start working.

[mojito]

The ECB makes up some pretend money that it lends to Spanish banks so they can buy Spanish bonds.

It’s a recipe for great financial stability.