Spain.

[Beet]

They're not quite recovering. And they're not quite holding the line, either. But heck, they're not deteriorating as fast, and that's worth noting.

-- A 17% drop in its central budget deficit. O/c, in the early stages of Greek austerity, the deficit also fell, only to blow out again as the economy began to contract. But so far, at least austerity is cutting the deficit, not growing it.

-- Reiterates it expects to achieve 6% deficit target. In the case of Greece, it was constantly announced that prior targets were going to be missed. The current target has held for some time, although it is still expected to be missed.

-- Lopez Carbajo said an increase in retail sales by large enterprises in recent months may boost value-added tax receipts.

In addition, the government's efforts should be supported by a better-than- expected performance by the country's large social security service, in charge of the pension system, as it would offset part of the central government deficit.

Spain's government said Thursday it anticipates the social security service will post a surplus for the year. In the first nine months of the year, the service recorded a EUR5.1 billion surplus, accounting for 0.5% of Spain's GDP. This surplus came even as overall pension payments rose 5% from the same period last year.

*

On the downside:

-- GDP growth evaporated last quarter.
-- Inflation is still running at 3% per annum.
-- Third quarter unemployment highest in 15 years.

I expect that when the new government comes in, there will be additional labor market reforms, but some stability in the continent-wide situation will be required for these to show effects.

[2952-0-0]

My understanding is that since Spain is the most "federal" country in Europe, changes in central government spending may not have that much of an impact. How have Spain's regional governments endured three years of plunging real estate taxes, and can the federal government be expected to bail them out?

[Wonkish1]

I do find it interesting that a year ago many would argue that Ireland was the country in the 2nd worst position and now its in a better situation(by most accounts) than Portugal, Spain, and potentially even Italy.

How could this be? Ireland focused the majority of its austerity on the spending side and refused to engage in much on the tax side. While the other countries the opposite is true. Today the country is hitting its deficit targets and the ones that did the opposite aren't hitting their's.

That appears to be a very strong case that cutting spending and keeping tax rates low is a much better way out of a sovereign crisis than the opposite, but I don't expect many on the left to really take notice nor back off their calls "for the rich to pay more."

[Tetro Kornbluth]

I do find it interesting that a year ago many would argue that Ireland was the country in the 2nd worst position and now its in a better situation(by most accounts) than Portugal, Spain, and potentially even Italy.

How could this be? Ireland focused the majority of its austerity on the spending side and refused to engage in much on the tax side. While the other countries the opposite is true. Today the country is hitting its deficit targets and the ones that did the opposite aren't hitting their's.

That appears to be a very strong case that cutting spending and keeping tax rates low is a much better way out of a sovereign crisis than the opposite, but I don't expect many on the left to really take notice nor back off their calls "for the rich to pay more."

Tonterías

[Beet]

It's amusing that whenever Ireland does well (mid-2000s, now... well now relatively), certain people tend to attribute it to low taxes and deregulation, whereas when Ireland does poorly, they attribute it to government interventions such as the bank rescue. At the end of the day it's a game of make-believe-what-you-want-to-believe and come up with a justification ex post facto.

As for myself I would point to a thread from awhile ago where I looked at just about every country in the eurozone, and the difference between "crisis" and "healthy" is whether said country has a current account deficit (bad) or current account surplus (good). Hum dee dum.

[Tetro Kornbluth]

It's amusing that whenever Ireland does well (mid-2000s, now... well now relatively), certain people tend to attribute it to low taxes and deregulation, whereas when Ireland does poorly, they attribute it to government interventions such as the bank rescue. At the end of the day it's a game of make-believe-what-you-want-to-believe and come up with a justification ex post facto.

Beet, I don´t agree with you often, but this is the greatest thing you have ever said.

[Wonkish1]

It's amusing that whenever Ireland does well (mid-2000s, now... well now relatively), certain people tend to attribute it to low taxes and deregulation, whereas when Ireland does poorly, they attribute it to government interventions such as the bank rescue. At the end of the day it's a game of make-believe-what-you-want-to-believe and come up with a justification ex post facto.

As for myself I would point to a thread from awhile ago where I looked at just about every country in the eurozone, and the difference between "crisis" and "healthy" is whether said country has a current account deficit (bad) or current account surplus (good). Hum dee dum.

Well that is why I used relative to peers. If I just said look at Ireland it would be one thing. But I pointed out that Ireland was worse than the all of the PIIIGS(minus Greece) last year and is now better than the rest of the PIIIGS today. Anybody looking at the situation would look at what the countries are doing differently.

It is a pretty strong piece of evidence you cannot deny that.

[Gustaf]

I would guess that there is a corrleation between a certain mindset required to wheather a crisis like this and certain policies. But I'm skeptical that there is a causation from the latter to the former.

[Wonkish1]

I would guess that there is a corrleation between a certain mindset required to wheather a crisis like this and certain policies. But I'm skeptical that there is a causation from the latter to the former.

I'll grant that you can't definitively show that, but I'll also say that a period of 1 year during a sovereign crisis does do a lot to keep the quantity of variables down and starkness of those variables up relative to other situations and longer time periods.

[Beet]

It's amusing that whenever Ireland does well (mid-2000s, now... well now relatively), certain people tend to attribute it to low taxes and deregulation, whereas when Ireland does poorly, they attribute it to government interventions such as the bank rescue. At the end of the day it's a game of make-believe-what-you-want-to-believe and come up with a justification ex post facto.

As for myself I would point to a thread from awhile ago where I looked at just about every country in the eurozone, and the difference between "crisis" and "healthy" is whether said country has a current account deficit (bad) or current account surplus (good). Hum dee dum.

Well that is why I used relative to peers. If I just said look at Ireland it would be one thing. But I pointed out that Ireland was worse than the all of the PIIIGS(minus Greece) last year and is now better than the rest of the PIIIGS today. Anybody looking at the situation would look at what the countries are doing differently.

It is a pretty strong piece of evidence you cannot deny that.

How did this thread become about Ireland? Haha. But yes, it's clear that Ireland is doing relatively better. I just think that it has more to do with Ireland's ability to correct its external accounts in a more timely manner than with its tax policy. Low taxes may help attract outside investment, but the primary driver is if outside companies think the country is a good investment to begin with. You won't invest in a country you think is going down the tubes, no matter how low the taxes are. The evidence I point to is that an examination of Ireland's current account explains not only why it is doing relatively better now, but why it got into a crisis in the first place. An examination of the other PIIGS' current accounts can also explain why they are still mired in problems.

[Wonkish1]

How did this thread become about Ireland? Haha. But yes, it's clear that Ireland is doing relatively better. I just think that it has more to do with Ireland's ability to correct its external accounts in a more timely manner than with its tax policy. Low taxes may help attract outside investment, but the primary driver is if outside companies think the country is a good investment to begin with. You won't invest in a country you think is going down the tubes, no matter how low the taxes are. The evidence I point to is that an examination of Ireland's current account explains not only why it is doing relatively better now, but why it got into a crisis in the first place. An examination of the other PIIGS' current accounts can also explain why they are still mired in problems.

Fair enough. I'll spare us the discussion about whether or not its tax policy helped to spur on its current account just because I don't want to take this thread more off topic that I already have.

[Beet]

How much more austerity can Spain be expected to take?

[Wonkish1]

How much more austerity can Spain be expected to take?

Gee mostly tax increase austerity doesn't help that much does it? And I hope you aren't trying to say that there budget problems would be better if they added more spending onto the problem and exasperated the situation.

[opebo]

-- A 17% drop in its central budget deficit. O/c, in the early stages of Greek austerity, the deficit also fell, only to blow out again as the economy began to contract. But so far, at least austerity is cutting the deficit, not growing it.

On the downside:

-- GDP growth evaporated last quarter.
-- Third quarter unemployment highest in 15 years.

Precisely Beet - this is why one cannot cut spending as a way out of a deficit - it just doesn't work.  When you cut spending the economic always collapses, and thus inflows to the State plummet.

Only Keynes showed us the way out - spending and redistribution lead to growing ones way out of a depression.

[Wonkish1]

-- A 17% drop in its central budget deficit. O/c, in the early stages of Greek austerity, the deficit also fell, only to blow out again as the economy began to contract. But so far, at least austerity is cutting the deficit, not growing it.

On the downside:

-- GDP growth evaporated last quarter.
-- Third quarter unemployment highest in 15 years.

Precisely Beet - this is why one cannot cut spending as a way out of a deficit - it just doesn't work.  When you cut spending the economic always collapses, and thus inflows to the State plummet.

Only Keynes showed us the way out - spending and redistribution lead to growing ones way out of a depression.

But they aren't doing much on the spending side. They are raising taxes.

[Yelnoc]

23% unemployment?  And we think we have bad on this side of the pond...

[Beet]

23% unemployment?  And we think we have bad on this side of the pond...

Yeah. O/c, in Europe, long term unemployment isn't the personal/financial/social/psychological/career death sentence that it is over here, but still...

[Wonkish1]

23% unemployment?  And we think we have bad on this side of the pond...

Yeah. O/c, in Europe, long term unemployment isn't the personal/financial/social/psychological/career death sentence that it is over here, but still...

I wouldn't be defending chronic/structural/secular unemployment as a good thing.

[Beet]

Edward Hugh has a good summary of the Spanish situation. I'm reprinting a lot of the charts here, but if you want to read the paragraphs (which you should) you'll have to head over to his blogs-

http://spaineconomy.blogspot.com/

The Root Of Spain's Problem Was The Property Bubble, But The Key To The Solution Is Restoring Competitiveness

"Internal demand in Spain is imploding. This is not surprising, with household debt just under 90% of GDP and private corporate around 120%, it is clear that both sectors badly need to deleverage. Classically the way to do this is by devaluing and boosting exports to sustain growth. But Spain is in the Euro, and has no money of its own to devalue. The common currency makes it very easy to generate distortions, and much harder to correct them. In that sense it is systemically biased towards negative outcomes, something the founders of monetary union didn't give enough thought to. The key institutional stabilisers- a common banking system, a common treasury, and a central bank capable of targeting interest rates on all the participating sovereigns - weren't in place from the start, and even now are considered controversial, so the constituent economies have a lopsided tendency to veer either one way or the other.   "



Clearly here, you see the massive bubble. In 1996, Spain was already a fully developed country with a high standard of living. Yet between then and 2007, household consumption increased from 90 billion to 140 billion euros per quarter. It was not until then that this unsustainable - and credit driven, as we shall see - increase in consumption reached a peak, fell back to 130 billion euros, then stabilized. But the new level is still too high from a national accounts perspective (e.g., it would have to be subsidized in fiscal union)



As you can see, since the crisis Spanish exports recovered rapidly in a V-shape and reached new highs quickly. It is heading in the right direction, but they started at such a low level that it will take several more years for the effect to be decisive.





















Here you see the massive consumption/housing bubble from 1996 was supported by 15-25% annual increase in bank lending for mortgages. Naturally, debt was increasing much more quickly than GDP, but because it was held in the private banking system, the EU rules that covered only government debt ignored this hidden time bomb.





Spain's ability to weather the crisis also depends on the global economy being strong.



Then Hugh goes on to analyze numerous issues facing the Spanish banks including equity issues and similarities vs. differences with Ireland.



Bottom line;

"Obviously accepting that Spain needs a full bailout is going to be hard for the German leadership, but the alternative of Spain Euro exit and default will probably prove even less appetising for them. After several years of neglect and refusing to face up to issues, talk is in the air of internal devaluation to address the loss of competitiveness Spain suffered during the boom, but so far nothing has been done. (emphasis added) Maybe this is the next reform Brussels should be discussing with Madrid, the most recent IMF proposals certainly point in this direction . Beyond all the talking, if Europe's leaders really do want to save the Euro, and not have Spain go back to the Peseta to devalue, then one day or another this internal devaluation will have to happen or the Spanish economy will simply never recover. If it doesn’t recover then the issue will not be simply saving Spain but rather how to save the global economy when the Euro then finally falls apart."

[jaichind]

See
http://www.businessweek.com/articles/2012-02-23/for-spain-an-economic-lifeline-from-china

I can also testify, being from the Chinese Province of Taiwan, that relatives and their friends that are in business have indicated that in their view, unit labor costs are much higher in Spain than in Germany.  Many of them have invested in busineses across Europe and have indicated that work ethic in Spain is a good deal worse than in places like Germany.  It does not come down to the number of hours worked but the overall attitude toward work.  They were not able to comment on Greece given they have not done business there but based on what they have heard it is even worse over there.  Of course the work ethic in USA is significantly better than all of Europe including Germany.

[opebo]

I can testify, being from the Chinese Province of Taiwan, that relatives and their friends that are in business have indicated that in their view, unit labor costs are much higher in Spain than in Germany.  Many of them have invested in busineses across Europe and have indicated that work ethic in Spain is a good deal worse than in places like Germany.  It does not come down to the number of hours worked but the overall attitude toward work.  They were not able to comment on Greece given they have not done business there but based on what they have heard it is even worse over there.  Of course the work ethic in USA is significantly better than all of Europe including Germany.

Maybe you haven't heard this yet in the 'Chinese province' of Taiwan, but generalizing glibly on other nationalities 'work ethic' is considered borderline racist in the American state of 'the West'.  Aside from this minor observation, even if we assume that your generalization is true, it is too much 'work ethic' which is the problem!  Germans, Chinese, Taiwanese, and Americans need to adopt Spanish lifestyle if we are to ever get out of this mess.

[LastVoter]

I can testify, being from the Chinese Province of Taiwan, that relatives and their friends that are in business have indicated that in their view, unit labor costs are much higher in Spain than in Germany.  Many of them have invested in busineses across Europe and have indicated that work ethic in Spain is a good deal worse than in places like Germany.  It does not come down to the number of hours worked but the overall attitude toward work.  They were not able to comment on Greece given they have not done business there but based on what they have heard it is even worse over there.  Of course the work ethic in USA is significantly better than all of Europe including Germany.

Maybe you haven't heard this yet in the 'Chinese province' of Taiwan, but generalizing glibly on other nationalities 'work ethic' is considered borderline racist in the American state of 'the West'.  Aside from this minor observation, even if we assume that your generalization is true, it is too much 'work ethic' which is the problem!  Germans, Chinese, Taiwanese, and Americans need to adopt Spanish lifestyle if we are to ever get out of this mess.

Or simply adopt 25 hour work week.

[opebo]

it is too much 'work ethic' which is the problem!  Germans, Chinese, Taiwanese, and Americans need to adopt Spanish lifestyle if we are to ever get out of this mess.

Or simply adopt 25 hour work week.

Same thing: double pay, halve working hours = lack of demand/excess production/deflation solved.

[Yelnoc]

I can testify, being from the Chinese Province of Taiwan, that relatives and their friends that are in business have indicated that in their view, unit labor costs are much higher in Spain than in Germany.  Many of them have invested in busineses across Europe and have indicated that work ethic in Spain is a good deal worse than in places like Germany.  It does not come down to the number of hours worked but the overall attitude toward work.  They were not able to comment on Greece given they have not done business there but based on what they have heard it is even worse over there.  Of course the work ethic in USA is significantly better than all of Europe including Germany.

Maybe you haven't heard this yet in the 'Chinese province' of Taiwan, but generalizing glibly on other nationalities 'work ethic' is considered borderline racist in the American state of 'the West'.  Aside from this minor observation, even if we assume that your generalization is true, it is too much 'work ethic' which is the problem!  Germans, Chinese, Taiwanese, and Americans need to adopt Spanish lifestyle if we are to ever get out of this mess.

Or simply adopt 25 hour work week.

If you cripple wage labor like that without any other supportive measures you can kiss good bye to American exports and say hello to a new underclass of Americans that can't survive on wage labors.

[jaichind]

Maybe you haven't heard this yet in the 'Chinese province' of Taiwan, but generalizing glibly on other nationalities 'work ethic' is considered borderline racist in the American state of 'the West'.  Aside from this minor observation, even if we assume that your generalization is true, it is too much 'work ethic' which is the problem!  Germans, Chinese, Taiwanese, and Americans need to adopt Spanish lifestyle if we are to ever get out of this mess.

I am sorry that you feel this way or that my statements are taken as such.  Of course I was merely stating the same thing that businessweek observed from the lens of my relatives.  If both views (businessweek and my) are interpreted as racist then I am very sorry that it had that affect.  I guess the point I was making is that a change in incentives toward what Saint Peter said "Those who does not work does not eat" is the way out of this unemployment crisis and not more of the same old tired demand mangement.