Spain Worse

By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from MacroBusiness

As I wrote early last week Antonis Samaras was to spend much of the weekend in talks with Angela Merkel and Francois Hollande about the future of his nation. As the Telegraph pointed out yesterday the results were, as expected, unconvincing:

Angela Merkel and Francois Hollande pledged to keep Greece in the Eurozone, but offered Greece no immediate relief from its current regime of painful austerity measures.

Both the German and French leaders stated that Greece must stay in the Eurozone, but must first prove that it will enact changes to its economy that satisfy the northern creditors. The statements thereafter made little sense with words such as:

[Greece] has to demonstrate the credibility of its programme and the willingness of its leaders to go the whole way, while doing it in a way that is bearable for the population.

I’m not even sure what that means, but it is very obviously not credible. As I stated in my previous post, Greece’s economy has been shrinking for nearly 5 years, the government deficit is still 9% of GDP, the current account deficit almost 10% of GDP even with an improving balance of trade (which is still negative), unemployment is over 23% and climbing and leading business indicators suggest that worse is yet to come.

In order to meet the requirements of the Troika, Greece is expected to cut another €13.5bn from the government budget over the next two years and by doing so will supposedly prove its credibility with the rest of Europe and its own citizens. This scenario is quite obviously delusional, and made more so if we go back 2 years and hear what the then Greek Finance Minster, George Papaconstantinou, said about Greece’s compliance.

“Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.

“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”

Two years on and all that has occurred is the unemployment rate has increased by another 10%, GDP has fallen by about the same and the country remains highly indebted even after a private sector write-down on sovereign debt. Quite simply the policy response has failed miserably and once again Europe has dragged itself back to the point of crisis over Greece.

As I stated in last week’s PMI post, the ability for Europe’s politicians to react is slowly diminishing as contagion spreads to their own national economies. Spiegel reports on the unenviable position that the German leader now finds herself in:

The IMF is taking a particularly hard line in the negotiations. The fund’s envoys feel that Greece’s debts are not sustainable and are threatening to withdraw from the aid program altogether. The only alternative is for the public creditors, in particular the European Central Bank (ECB), to write off a portion of Greece’s debt.

The German government faces a dilemma. Chancellor Angela Merkel had made IMF participation a condition of any Greek bailout, but if public-sector creditors agreed to a debt haircut, it would cost Germany many billions of euros.

For Merkel, that is out of the question, as is a third aid package or extending the current program by two years, as Samaras has requested. Both of the latter two options would cost additional money, and that, the chancellor fears, is something members of her own party, the Christian Democratic Union, and its coalition partners, Bavaria’s Christian Social Union (CSU) and the business-friendly Free Democrats (FDP), would refuse to support in the German parliament, the Bundestag.

There is obviously the other issue of the German constitutional court and whether it will decide whether to block the ESM. My feeling is that this is unlikely, but that does not rule out caveats that limit the capacity of the ESM which may hamper other efforts by the ECB.

Angela Merkel and Francois Hollande agreed that there would be no final decision on Greece until after the Troika report was delivered. Although this was supposed to occur in September there are now reports that this document will not be ready until some time in October. The Eurogroup are due to meet in Luxembourg on October 8, and are expected to discuss the outcome of the report in the lead up to the EU summit in Brussels on October 18. There is now some doubt whether the report will be ready in time, and I suspect if true, will quickly lead to questions about political stalling around the decision.

In the meantime, while the focus is back on Greece, the other parts of the Euro-crisis roll not-so-merrily on. We still haven’t heard of any bailout requests from Spain, but overnight the National statistics office provided some new data that will probably speed up the process:

It seems Spain’s economy was in a worse state than we knew.

GDP contracted by more than previously estimated in 2010 – by 0.3 percent – more than the 0.1 percent contraction originally reported. It also grew by just 0.4 percent last year, which was less than the 0.7 percent figures first published.

The just released revised figures from the National Statistics Institute in Madrid play into fears about Spain’s ability to rein in its public deficit. The official data provider said the changes were a result of new structural data available and revisions to preliminary data

The downwards revision to the 2011 growth figures was a result of a change to external demand figures, which showed exports were slightly weaker than first thought.

Meanwhile Spain’s neighbour, Portugal, looks also to be struggling to meet its targets due of a very familiar, yet for some reason always “unexpected”, feedback problem:

Dwindling tax revenues brought on by record joblessness and deep recession will force Portugal to seek breathing space, much like Greece has, on commitments to EU-IMF creditors, analysts say.

In data published Thursday, the Portuguese budget office said 2012 first half tax receipts dropped 3.5 percent compared with the same period last year, hit by a fall in consumption as the economy shrank and unemployment reached 15 percent.

As things stand, the government, which had forecast an increase in revenue of 2.6 percent this year, is set to miss this year’s deficit target of 4.5 percent, several analysts agreed, if it cannot come up with an extra two-three billion euros ($2.5-3.8 billion).

Finance Minister Vitor Gaspar, unable to foresee the impact of austerity measures on the Portuguese economy, “has lost the fight”, wrote business daily Diario Economico in an editorial.

Paulo Mourao, economist at the University of Minho, said the new data served to “lay the ground” for “needed flexibility on Portugal’s rescue programme.”

Obviously Portugal will be watching the outcome for Greece very closely.

Print Friendly, PDF & Email


  1. Bill Frank

    [Greece] has to demonstrate the credibility of its programme and the willingness of its leaders to go the whole way, while doing it in a way that is bearable for the population.

    Bearable for the population? Seriously? The fact of the matter is that the super rich elites don’t give a damn about the “population” in Greece, Europe, the U.S or anywhere else. There is an agenda to follow and the “population” is fixed in the crosshairs of worldwide “auterity” to funnel more and more to the top. Greed has no boundary.

    1. Ignacio

      It has been shown that those guys, the european political leaders but not only those from creditor countries, only care rhetorically about the “population”. In fact they are pursuing deliberately plocies that increase already high unemployment numbers. Another question that this article reflects is that european politicians are blind about recent economic developments. Predictions and past measures are both revised down constantly and politicians seem not to notice that failure.

      Notice that the word “citizens” have almost dissapeared from the languages. At best, citizens have been downgroded to “population” or worse to “consumers”,”labor force” or even worse “labor factor”.

      1. Jim

        Ignacio, why do you use the term, “European political leaders”?

        Mexico and the US have far more in common that Germany and Greece, yet no one ever uses the term, “North American political leaders”.

    2. Another Gordon

      A fesw months ago I asked a young man I know from a very upper tier Greek family whose parents live in one of the more exclusive suburbs of Athens – just down the road from a leading member of the government apparently – how the crisis was affecting his parents.

      “Not much at all really” was his reply.

      No wonder the same old failed ‘solutions’ can be trotted out again and again when the elites just don’t experience any of the pain.

    1. Ignacio

      Ifyou read the media, that would be the end of the world for greeks. A grexit would be followed by the 7 plagues, an holocaust, and radioactive destruction of the country.

    2. Max424

      If Greece did it right, their troubles would be over in a fortnight.

      But that would defeat the purpose, wouldn’t it? Crushing sovereignty and creating permanent depressions is what this is all about.

      1. Carla

        The hyper-links to some of your names — Bill Frank and Max424 — don’t seem to work. I can’t seem to get there from here.

      2. Eric

        Greece politicians must be pretty stupid than wanting to stay in the euro. Do you really think it’s that simple?

        1. Max424

          Some Greek politicians are pretty stupid, the rest are willingly, selling out their country.

          Greece will give up the common currency at some point. The question is, how much damage will be done before they do.

          1. Synopticist

            The thing is, most Greeks themselves don’t want to leave.
            They don’t want to go back to the Drachma. A big reason is because they know their own gross elites woulld then buy up even more of the country in devalued Drachma with their Euros.

        2. Jim

          Not stupid, Eric. Just treasonous.

          They care more about how they are thought of in Brussels than in Athens.

  2. Jorge

    Portugal will go the same way as Greece, Ireland will follow and after that Spain and Italy. The receipt which is being used for these countries is old and has always proved wrong.
    In Portugal’s case the shift from left wing to right wing, policies is a disaster, now there’s a left wing fiscal burden on the general public and a right wing public expenditure policy (if you want monetarism vs fiscalism).
    The only outcome of this is going to be the Monetary Union breaking apart and a deep recession all over Europe which can extend to other zones.
    The principles that were behind the creation of the EU are being thrown to waste and the only thing that matters now to the EU leaders is how many votes will bring a decision.
    For my country and others that are being “aided” by the troika, I think that a change in the justice system and the criminalizaton of certain practices in the financial and politic sector would provide a lot better results than what’s being done right now.
    Oh well…

  3. Jim Haygood

    The Eurogroup are due to meet in Luxembourg on October 8, and are expected to discuss the outcome of the [Troika] report in the lead up to the EU summit in Brussels on October 18. There is now some doubt whether the report will be ready in time.

    LA LA LA, we’ve got all the time in the world! Somehow, I doubt that.

    Weak GDP data from Spain is not as concerning as the ongoing slow-motion bank run there. As of July, Spanish banks bled 4.7% of their deposits vs. June, and 12% versus a year ago. This yawning gap (which suggests outright insolvency) is being plugged with Spain’s TARGET2 liabilities to the ECB, which have escalated to the half-trillion dollar range.

    Is the bipolar Ms. Market just gonna stand by and politely wait until 18th October to see what the eurocrats do? Or will the dastardly rumor-mongers, cash hoarders, gold huggers and currency speculators crawl out from under their rocks to threaten the Peoples Currency?

    Greece is the pin on the euro grenade …

    1. Sy Krass

      ..or the Spanish bank run, or a posible coup in any given country. Don’t forget, last Sept + Oct while bond yields in Europe were going up, bond yields across the globe wth the exception of the US and Japan (the biggest will collapse last) spiked as well.

  4. Hugh

    Of course, Spain and Greece are getting worse. This is a kleptocratic process. It has never been about solving their or Europe’s problems. It is all about keeping the looting of the 99% going as long as possible. Nor will the inevitable blowup change this dynamic. It will simply shift the looting to a new phase, the looting of the crash.

    It is important to remember that Europe has 6 critical inter-related problems. Comparing these to what has been going on there for the last 2 years shows how irrelevant the dozens of so-called “solutions” have been.

    1) Lack of a democratic fiscal and debt union
    2) A weak central bank
    3) An insolvent predatory banking system
    4) Mercantilist trade patterns within the eurozone
    5) Completely corrupt political classes
    6) A ruling kleptocratic class of the rich

    Until these problems are resolved, there is no hope that things will get better for Europe’s 99%s, and these problems can only be resolved by Europe’s 99%s. Its 1%s, the rich and their servant elites, are precisely the ones who have created and benefit from the current state of affairs.

  5. theblamee

    Spain is worse? You have this whole collapse thing all worked out, right? Except that Spain is still here. We are still talking PIIGS not just PIIG, right? So, Spain isn’t really all that bad? I mean, Spain is still here, right? But, when something really does happen, you’ll let us know, right?

  6. Nathanael

    I am really surprised that the *IMF* is on the side of sanity and good (advocating debt write-offs) all of a sudden. What happened to its management? Did they actually learn from experience, or were they just replaced recently?

Comments are closed.