Euro Crisis

Spain Announces Unpopular Spending Cuts

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The Spanish Prime Minister, Mariano Rajoy, has broken a campaign pledge and announced cuts and tax hikes in a bid to cut sixty five billion euros over two and a half years from the public budget. The bailout for Spanish banks that was finalized yesterday is conditional on a reduction of public spending. While EU officials have welcomed the move, Spanish workers are protesting in Madrid.  

Although Spain did not get into its current situation by overspending, it is facing problems that are in many ways worse than Greece's. Unemployment in Spain is at close to twenty five percent, while youth unemployment is over fifty one percent. These numbers are broadly comparable to Greece's unemployment numbers. However, unlike Greece, Spain is Europe's fourth largest economy. If the latest bailout, spending cuts, and tax increases cannot reassure the markets quickly the euro may collapse sooner than many expected.

Daniel Hannan, a Member of the European Parliament for Southeast England, laid out how crucial Spain is in the euro-crisis:

Spain was always likely to be where the issue would be settled for good or ill. 

Remember that, of the 17 eurozone members, only five are net budget contributors: Austria, Finland, Germany, Luxembourg and the Netherlands. Of these, Finland and the Netherlands are strongly objecting to funding bailouts unconditionally, and you can see their point. It's not just the robbing-Pieter-to-pay-Paulo objection. It's that every previous bailout has failed. If the problem was artificially cheap credit, argue politicians in these countries, surely the solution can't be more cheap credit.

There are still those that warn against cuts in spending, arguing that such measures will increase unemployment. The International Labour Organization, an agency run out of the UN, has warned that 'austerity' could see as many as 4.5 million more jobs being lost. ILO director-general Juan Somavia warned that:

Unless targeted measures are taken to increase real economy investments, the economic crisis will deepen and the employment recovery will never take off.

In other words, more cash is needed, and quickly.

Unfortunately it seems that the voices of those like Hannan are a minority, while the sentiments of Somavia and others seems to be in a loud majority, especially if the protests in Madrid are anything to go by. 

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  1. Pain.

  2. Print more money: give it all away
    spending cuts can wait for another day.

    1. True poetry.

      1. It made me touch myself.

        1. Take your finger out of there now!

  3. The Spanish Prime Minister, Mariano Rajoy, has broken a campaign pledge and announced cuts and tax hikes in a bid to cut sixty five billion euros over two and a half years from the public budget. The bailout for Spanish banks that was finalized yesterday is conditional on a reduction of public spending.

    OK, well his career is over.

    1. While being ignorant of Spanish politics, I’m gonna guess his future wasn’t looking so bright in any case.

  4. Although Spain did not get into its current situation by overspending,

    The only alternative I can think of is that they got into their current situation by undertaxing. Sure you want to go with that?

    1. It would be nice if Reason had editors to catch such howlers.

    2. There was a degree of overspending by Spain, but it was its investment in the housing market that really caused the situation Spain is experiencing at the moment. Compared to Italy and Greece Spain behaved with some fiscal responsibility.

      1. There is nothing fiscally responsible about keeping insolvent banks open. NOTHING.

        Maybe Spain was reasonably responsible during the run-up. But when the boom turned to bust they threw fiscal responsibility out the window.

      2. So it wasn’t overspending. It was over-investing. Got it.

        1. Overleveraging.

    3. The only alternative I can think of is that they got into their current situation by undertaxing.

      You’re not thinking hard enough. Spain had low public debt before the crash, which has been mentioned repeatedly. Chart here.

      1. And I’ve been reading that Spain’s government numbers have been more dishonest than China’s.

        Also, looking at federal numbers without looking at regional numbers is just asking to be deceived.

        1. Spanish Regional debt/GDP was also low before the financial crisis: 6-7% of GDP in 2008, for a regional + national debt/GDP of about 45% in 2008. For fun, compare that debt/GDP ratio to Germany’s in 2008. The morality tale among right-wing simpletons is simple, neat, and wrong. Kudos to Feeney for getting this right.

          Regional debt explanation here. Or, just look at the chart.

          1. The debt is due to one/or both of : (a) too much spending (b) too little taxing.

            That isn’t a morality tale. It’s simple arithmetic.

    4. There was overspending. Look at this: http://www.dailymail.co.uk/new…..-ruin.html
      and: http://www.nytimes.com/2012/07/09/wor…..under.html
      The only reason why they could spend so much was because the euro gave them artificially low interest rates.

    5. I think the notion is that taxes automatically scale to the economy, but spending is sticky. Economy shrinks, you get a deficit.

  5. Hannan is right that more cheap credit will not help, and the ILO is right that spending cuts and tax increases will not help, either. Default is the only way.

    1. Default won’t help either. It’s not a magic spell that gets you out of trouble, it has real consequences.

  6. I’m not sure it was mentioned yet here at Reason, but the German Supreme Court wants to take its time before ruling on the constitutionality of the ESM. http://www.spiegel.de/internat…..43832.html

  7. Spain is going about this in the wrong way. While spending cuts are welcome, any good is being offset by the bite from tax hikes. My Spanish father in law already pays something like 56% in income tax alone, and my Spanish brother in law told me recently that by law retailers are only allowed to place items on sale twice per year. And problems in the labor market, which encourage the use of temporary contracts given onerous regulations associated with permanent workers, are well documented.

    I fear that Spain is going to cut some, raise taxes, the economy will stagnate and then Krugman etc. will run around shouting “I told you so” about how budget cuts only spread misery. Well, they are pretty much doing that already.

    1. In case I didn’t make clear, Spain needs to place a MUCH bigger emphasis on deregulation and privatization. Free the market and growth will follow.

    2. “by law retailers are only allowed to place items on sale twice per year.”

      See? It’s the damn de-regulation that causes all the problems!

      1. Back when they could have only one sale per year, there was calm and order. Now that there are two sales per year, it’s pure anarchy. Might as well be in Somalia.

  8. I’ve got a trip booked to Paris and Barcelona in October. Hopefully they’re both still standing and not riot-infested by then.

  9. Unemployment in Spain is at close to twenty five percent, while youth unemployment is over fifty one percent.

    Hire them to write your alt-text.

    1. This boggles my mind. What are these millions of people doing, just sitting around all day? Get off your damn duff and put yourself to work, stop waiting for some magic bureaucrat to come give you a job!

  10. Sounds to me like they might be onto somethign dude.

    http://www.Mega-Privacy.tk

  11. “Hello. My name is Inigo Montoya. You cut my job. Prepare to die.”

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