Europe, in Slump, Rethinks Austerity
The Wall Street Journal | May 1
Spain has joined seven other euro-zone nations in recession, according to data released Monday, providing new evidence that austerity policies are failing to spark confidence in the region’s economies ahead of a week of expected anti-austerity protests and a string of important national elections.
Spain in recession as austerity bites deep
Reuters | April 30
Spain sank into recession in the first quarter and economists said spending cuts aimed at meeting strict EU deficit limits, together with a reeling bank sector, would delay any return to growth until late this year or beyond. It is the second recession in just over two years for the euro zone’s fourth largest economy and comes as the government tries to convince investors it will not need outside aid to put its house in order. The country is caught between pressure from its European peers to fix public finances and growing domestic resistance to austerity measures that have helped push unemployment to more than double the EU average.
Spain slides back into recession
The Telegraph | April 30
Germany continued to heap pressure on Spain. Speaking alongside his Spanish counterpart in Santiago de Compostela, German finance minister Wolfgang Schäuble said there should be no easing of austerity in Spain. He said: “The first condition is economic and fiscal consolidation. If now we talk about growth, it shouldn’t be understood as a change of direction. That would be a mistake. The focus [on austerity] needs to remain.”
Recession in Spain Breeds Pessimism in Global Markets
Associated Press | April 30
The contraction in Spain’s economy is dimming hopes that the government will be able to cut its budget deficit as predicted and raises the specter that the country might be locked into a downward financial spiral. A recession makes it more difficult to lower the deficit, and as investors lose confidence in the country, borrowing rates rise, adding to the financial pressure. Ratings agency Standard & Poor’s on Friday downgraded Spain to just three notches above junk, following up the move on Monday by lowering its rating for 11 Spanish banks. Investors are worried that Spain will not be able to support its banks, which are burdened with massive amounts of bad loans from an imploded property market. But rescuing Spain, the fourth-largest economy in the 17-country eurozone, might prove too expensive for the continent’s bailout funds.
Why We Should Worry about Spain’s Economic Pain
Time | May 1
We should all be very worried about what’s going on in Spain. Because Spain isn’t Greece. The Greek crisis was most likely not a direct threat to the survival of the monetary union. Its economy was simply too small. The danger was in the possible contagion effect Greece might present if it outright defaulted or bolted from the union. Spain, the zone’s fourth-largest economy (after Germany, France and Italy) can do a lot of damage all by itself. If Spain ultimately requires a bailout, it would strain the resources available in the zone’s rescue fund (the European portion of which was recently boosted to a total of $925 billion) and put pressure on the zone to fatten up the fund even more, which Germany and others have been reluctant to do. Such an event would also be the biggest blow to the future of the euro yet, likely reigniting the crisis in Italy and making other bailouts more likely (especially for Portugal). With emerging markets slowing down, Europe in the toilet, the U.S. recovery uncertain, and energy prices high, a Spanish meltdown is exactly what the global economy doesn’t need right now.
Fiscal consolidation: Too much of a good thing?
John Van Reenen (London School of Economics) via Vox | April 27
Germany is rightly concerned about past and future fiscal profligacy by countries like Greece undermining the euro. But the problems of Spain and Ireland, for example, stem not from public borrowing but rather high private debts due to the aftermath of the construction bubble. Forcing Spain down to a deficit of 3% of GDP by 2013 when the 2011 level is 8.5% is, as my colleague Luis Garicano describes it, “Mission Impossible”. Or as the Economist (2012) puts it “The misguidedness of today’s austerity obsession is clearest in Spain…Relying on austerity alone, in a shrinking economy after a huge private debt burst, is a recipe for deflation and depression that could easily end up worsening the underlying fiscal position”
This post originally appeared at The Capital Spectator and is posted with permission.