The Prodigal Greek

The Greek crisis through a different prism

Austerity Psychosis

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The last Friday of 2011 saw headlines of Spain’s new center right government pledge to implement a tough austerity program in an attempt to “turn the economy around”.  It is an oxymoron in itself to have austerity and growth to turn an economy around in the same sentence.

There must not be a single unbiased observer of what has been unfolding in Europe in the last two years that does not recognise the fact that “expansionary austerity” has failed, has failed so miserably since it was first introduced in Greece in May 2010 that has turned a minor deficit issue of a country representing less than 3% of eurozone’s GDP into a full-blown crisis that threatens to bring down the entire euro structure as we currently know it.

Portugal, Ireland, Italy, Spain all going down the same destructive path dictated by Germany in exchange of ECB support and so-called ‘bail-out’ programs that only intended to keep the stability of, the heavily exposed  to the periphery, banking systems of the ‘benefactors’ Germany and France.

In all applications of fiscal consolidation the draconian austerity worked as a virus for each economy rather than a cure, pushing down demand, consumer confidence and spending, production and growth.  One need not look any further than Greece to realise the extent of the damage.  In only 18 months, since the program was introduced, approximately 300’000 jobs are lost and 500’000 people are in long-term unemployment, in a labour force of around 5 million.  The Greek economy is expected to contract in 2012 by 3-3.5% adding up to a combined 13% for the duration of the “expansionary austerity”.

The insanity of all this is that these policies obviously work against the purpose that EU and IMF aimed to achieve.  The contraction of the economy leads to lower revenues and higher expenditures to support the out of job work force.  In this article in the english version of Kathimerini newspaper in Greece, all revenue targets to Nov this year are off simply because income, consumption, transactions and in general taxes directly linked to economic activity are down between 5% and 22%.  A never-ending vicious cycle.

Even if one wants to isolate Greece as a special case, and in many public sector related aspects it certainly is, the implementation in Ireland and Portugal brought the same results from a fiscal and budget execution perspective.

However, Spain makes of an even more interesting case in this austerity madness and a look in the country’s public finances history (graph below) proves not only the point but at the same time the extent of undisputed domination of the austerity theorists.

Spain vs. Germany budget balances and gross debt as % of GDP (Source: Thomson Reuters Datastream)

Since the introduction of the euro, Spain has been one of the most responsible countries in managing both spending and as a result the country’s obligations.  Even compared to Germany, that has been presenting itself as the model of fiscal discipline, Spain has been running modest deficits and even surpluses in the years to the 2008 financial crisis and its debt obligations were steadily declining to levels below 40% of GDP when Germany in the same year had its debt closer to 70% of GDP.  Not by any stretch Spain’s record indicates any recklessness in managing the country’s finances.

When the crisis hit, the local property bubble burst and along with it many regional banks whose irresponsible lending led to the formation of the bubble.  Spanish government had then to step in and save the banking system through the creation of a bank bailout plan and introduce a stimulus package to counterbalance the effects of the recession that had already hit the economy.  It was because of these necessary measures that the country’s deficit and debt increased.

The crisis hit the economy and the job market with ferocity, unemployment breached 20% in May 2010 with 4.6 milion people without a job.  The weak recovery of 2010 combined with the spanish government’s untimely effort to control the deficit during the second half of 2010, after pressure from Brussels, only accelerated the job losses with the unemployment rate in October 2011 at 22.8%.  This has a knock on effect on the banking system, just recovering from the crisis and credit bubble, with non performing loans reaching their highest since 1995, over 7%.

Spain GDP vs. Uemployment and bad loans (Source: Thomson Reuters Datastream)

Spain started as a textbook case of countercyclical measures to soften the blow of the slump with a deficit increasing at times of recession with the aim to return to surplus and debt reduction when the economy recovers and the private sector will resume investment and production.  Something that Spain has successfuly done in the past.

The fiscal discipline that was introduced in the later part of 2010 has led to weak economic growth in 2011 with the Spanish Central Bank already admitting that preliminary data for Q4 2011 show that the country has entered recession territory.  At the same time almost one in four Spaniards are out of a job, similarly to Greece the younger generation is mostly affected.

At this critical point, a new government comes in to do the unthinkable and introduces more of the same recipe that has already affected Spain’s economy and has damaged the economies of Ireland and Portugal and destroyed the economy of Greece.

Spain is one of the most responsible countries in the management of public finances, why not leave it alone to do what it has historically proven it can do well instead of inducing more of the same medication that is bound, with mathematical precision, to break  an already damaged economy in the eurozone?



Written by Yiannis Mouzakis

December 31, 2011 at 6:57 pm

Posted in Economico

Tagged with , , , , ,

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