Posted by: Dirk | July 11, 2012

Pain killer – or killer pain? The Spanish patient gets his new prescription

The document imposing the conditions for the bail-out of Spanish banks is available online at the EL PAIS website. Here is an extract regarding the austerity policies:

VI. Public finances, macroeconomic imbalances and financial sector reform

29. There is a close relationship between macroeconomic imbalances, public finances and financial sector soundness. Hence, progress made with respect to the implementation of the commitments under the Excessive Deficit Procedure, and with regard to structural reforms, with a view to correcting any macroeconomic imbalances as identified within the framework of the European semester, will be regularly and closely monitored in parallel with Consumer protection and securities legislation, and compliance monitoring by the the formal review process as envisioned in this MoU.

30. According to the revised EDP recommendation, Spain is committed to correct the present excessive deficit situation by 2014. In particular, Spain should ensure the attainment of intermediate headline deficit targets of [x]% of GDP for 2012, [x]% of GDP for 2013 and [x]% of GDP for 2014. Spanish authorities should present by end-July a multi-annual budgetary plan for 2013-14, which fully specifies the structural measures that are necessary to achieve the correction of the excessive deficit. Provisions of the Budgetary Stability Law regarding transparency and control of budget execution should be fully implemented. Spain is also requested to establish an independent fiscal institution to provide analysis, advice and monitor fiscal policy.

31. Regarding structural reforms, the Spanish authorities are committed to implement the country-specific recommendations in the context of the European Semester. These reforms aim at correcting macroeconomic imbalances, as identified in the in-depth review under the Macroeconomic Imbalance Procedure (MIP). In particular, these recommendations invite Spain to: 1) introduce a taxation system consistent with the fiscal consolidation efforts and more supportive to growth, 2) ensure less tax-induced bias towards indebtedness and home- ownership, 3) implement the labour market reforms, 4) take additional measures to increase the effectiveness of active labour market policies, 5) take additional measures to open up professional services, reduce delays in obtaining business licences, and eliminate barriers to doing business, 6) complete the electricity and gas interconnections with neighbouring countries, and address the electricity tariff deficit in a comprehensive way.

The intellectual failure in all of this is breathtaking. Less government spending and lower incomes should lead to economic growth, according to the program. This is implausible for most normal people, yet the European policy elite continues with austerity policies as if nothing is wrong with it. The Socialist Zapatero government started these austerity policies, and the Conservative government continues them. Meanwhile, on the labor market (courtesy of the ECB):

My guess is that the next Spanish prime minister will not be from a party of the center. Spain’s politics degenerates towards the Greek state of affairs, with the two former popular parties on their way down. Voting intentions for the big two parties of Spain have fallen from 75 to 60 percent by now, according to recent polls.

It seems that the alternative view, like presented here by Paul Davidson, is not politically acceptable, at least not to those in power. The euro zone has a problem. The solution to the euro problems can come only from Germany, but only Germans get to vote for the German government. And German voters – indoctrinated by economists who point to the hyperinflation of the 1920s instead of the debt-deflation of the Brüning era and a more and more nationalistic media – don’t want to see reforms which they perceive as (potential) losses to their financial wealth. We clearly have a political problem, not an economic one. However, economists played a large role in creating that political problem.


  1. Painful decisions will have to be taken; less and less of expenditure and maximising the tax base. Spanish people will have to make some sacrifice to protect their future.

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