EU: Spanish revolt brews as national economic rearmament begins in Europe

The Telegraph ^ | 2/26/2012 | Ambrose Evans-Pritchard

[bruinbirdman]

Spain's new prime minister has looked into the abyss and recoiled.

Though he swept into office as an apostle of orthodoxy, Mariano Rajoy has since delved into Madrid’s ghastly accounts and concluded that it would be "suicidal" to try to slash the budget deficit from 8pc of GDP to 4.4pc of GDP this year, as demanded by Europe's fiscal Calvinists.

Such a policy would require a further €40bn or €50bn of cuts and accelerate the downward spiral already underway, beyond the 1.7pc contraction expected this year by the International Monetary Fund.

The unemployment rate would rise to well over 25pc with six million out of work by the end of the year, equivalent to 30pc under the old definition used in the last jobless crisis in the early 1990s.

A study by BBVA of 173 cases of fiscal squeezes in OECD countries over the last thirty years concluded that demands on Spain are almost unprecedented. They found only four such cases, and three were offset by devaluations. Fourth was Ireland in 2009. The country crashed into slump, culminating in a 54pc fall in Dublin house prices.

There is near unanimity across the political spectrum that drastic pro-cyclical tightening at this stage is unwarranted and dangerous. Josep Borrell, ex-president of the European Parliament and the voice of Spain's pro-European establishment, said such debt-deflation risks pushing the banking system over the edge. "To cut the deficit almost four points in one year would be a true depressionary shock for an anaemic economy, made worse by the requirement for banks to mark their real estate losses to market prices."

"We have reached the point where `taxes kill taxation'. The therapy is turning fatal and is starting to take on a highly political tone. Sixty years after the end of the war,

[Vince Ferrer]

Any government that can print money and inflate, will do so, because to not do that will cause riots and unrest. For us, there is no good alternative between austerity and inflation, although I prefer austerity in order to get it all over with sooner. But from the elite perspective, inflation is always better than austerity, because austerity would cause unrest which could topple the elite out of power. (Which is another good reason to advocate austerity from my perspective) So, inflation it is, and despite the debt ceilings and such, we are not going to seriously make cuts, even though I will still advocate them.

[Mr. Jeeves]

The people will resist.

And they will do so by supporting any authoritarian who promises to hang the bankers and keep the benefits flowing. Europe has been down this road before, not too many decades ago.

[kabar]

Inflation will not solve our problems any more than it did in the Weimar Republic or Argentina. And don't forget that with more than 50% of our budget (and growing) devoted to the entitlement programs, inflation will drive their costs up (COLAs, medical services, etc.) and so will the debt servicing costs on the national debt, which have benefitted by the Fed's holding the interest rates below historical norms. We could be looking at debt servicing costs over a $trillion annually.

We have 54 million on SS, 47 million on Medicare, 60 million on Medicaid (Obamacare will add another 18 million to this total), and 46 million on food stamps. Inflation is not better than austerity when it comes to maintaining social order.

[kabar]

And the question is how do you keep the benefits flowing? The birthrates for most of Europe are below replacement level. There are fewer workers to tax to provide benefits for aging societies.

We are in better position demographically in terms of birth rates (we are at replacement level), but we are aging as well. In 1950 there were 16 workers for every retiree, today there are 3.3, and by 2030 there will be only two. And by 2030, one in five residents of this country will be 65 or older, twice what it is now. How much can we tax our children and grandchildren to keep the benefits flowing?