Posted by: Dirk | February 1, 2013

Spain prepares a move away from austerity

Reuters reported on Monday that Spanish president Mariano Rajoy will actually move away from austerity and towards fiscal stimulus, trying to make Germany move the same way:

Spain’s conservative prime minister is preparing a package of small measures – such as tax breaks for young entrepreneurs – to stimulate the economy even as he vows to stick to budget cuts.

Prime Minister Mariano Rajoy, whose popularity has plummeted after a year in the job, will announce the steps on Feb. 20 in his first State of the Union address in an effort win back public trust after severe spending cuts.

In recent weeks Rajoy has called on euro zone creditor countries such as Germany to do more to stimulate growth, a plea that has largely fallen on deaf ears.

This is a significant shift in policy and could open up the discussion of what caused the crisis and how to deal with that. With the corruption cases making more and more headlines in the Spanish media, the Spaniards now seem to understand that it was a credit-financed real estate bubble that ruined their country, not public spending. The question then becomes who is responsible for the oversight of the financial stability. Finally, it is a European currency. Did the Americans blame the people of California, where the real estate bubble was very big, blame for having over-consumed? No, of course not. The banks were bailed out, never mind where the people who received the loans lived or where the banks are located. This is the critical issue.

In a European Monetary Union, financial bubbles will always occur. It will affect some regions but not others. Punishing those regions by not bailing out their banks will condemn them to economic stagnation. Especially those that are young are hurt by this, which is hard to justify ethically.

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