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Spain Circles the Drain

As if Europe weren’t already weary of bad news, here’s more: The Spanish Prime Minister is begging Brussels to ease his country’s deficit-reduction targets, only one day after an international agreement on a massive bailout fund for his government. Based on a recent European Commission forecast of declining growth in the coming year, Spain believes that it cannot meet the established targets, and is using an age-old excuse for its cop out: “everyone else is doing it.” Even the strongest European countries have been hit hard by austerity-based cutbacks and uncertainty over the credit crisis, and Spain is no exception. Youth unemployment is soaring, and as in Greece, the public vehemently rejects cuts aimed more at helping foreign bankers than restoring their own country to health.

This is horrible news for Europe. The lack of a coherent policy solution has paralyzed the continent, and with government credit ratings inching downwards, righting the ship will become more difficult with each passing day. Painful cuts and sluggish growth have sharpened acrimony throughout the Union, making compromise that much harder to achieve. At some point, the union could be broken beyond repair. That point may be much closer than people think.

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  • Anthony

    Reads like someone has over promised and under delivered and austerity options make growth harder to imagine (little growth and too much debt). The European Union may need a mid course correction – as well as raise bank capital.

  • LarryD

    The banks are going to have to take a haircut, eventually. The smart bankers have been trying to get their balance sheets in order. I’m amazed that anyone is willing to make sovereign loans anymore.

  • EvilBuzzard

    What’s with these austerity freaks anyhow? You know, I know and Paul Krugabe knows that when your debt > 100% of your GDP, the only logical thing you can do is borrow, stimulate growth and let the growth rate pay off all future debt incurred. It’s working like a charm for Greece, Italy, Portugal, Amerika…

  • Kenny

    All the parasites are looking to Germany to keep the good times rolling, not knowing that Germany is not the powerhouse it is made out to be.

    Sooner rather than later, Germany’s welfare state will start folding up even without the burden of having to carry the PIIGS.

    Look into the future, Mr. Mead — 20 years or so out, and you’ll see the probability of WAR is much greater than anyone dare admits.

    And who knows, maybe it will take a war to clear the air. Nothing else seems to be doing the trick.

  • Andrew Allison

    As Prof. Mead points out, the situation in Europe is steadily deteriorating — the circling the drain analogy applies to the whole eurozone. The attempt by the core to sacrifice Greece to protect its financial interests is doomed to failure, and the risk of contagion high: the only way out is shift more of the pain to the lenders and countries who benefited from the lending via exports. Germany in particular will have to acknowledge the extent to which its surplus is the PIIGS deficit.

  • Eurydice

    Today’s Wall Street Journal has quite a few articles on this situation. An interesting one is “The EuroZone’s Austerity Dilemma” which points out that most of the measures undertaken by the various governments have been tax increases – the real austerity is only just beginning.

  • Jim.


    Look at the defense budget numbers.

    If there were another European war, either the Russians would win, or we’d be sucked in to honor NATO commitments.

    Either way, it would not be good or us, period, and we should work to avoid it.

  • Mike M.

    It’s also very important to bear in mind that when the Paul Krugmans of the world talk about government austerity, they’re not even talking about honest to goodness spending cuts. What they consider to be “austerity” is government spending growing at a rate of “only” one to two percent a year instead of the seven to eight percent a year that the big government welfare state advocates consider to be an established baseline.

    But whether they like it or not, they had better get to it, because the old days of eight percent annual growth in spending are over, and they’re not coming back.

  • Kenny

    @ JIm,

    I was thinking more of a war between those in northern Europe and southrn Europe, which would include France.

    Russia? Aside from their nukes, it is a basket case that is demographically dying the fastest of al. The ruskies have their hands full trying to stop their country from fragmating into its many hateful parts.

  • Jim.


    Whatever Russia’s weaknesses are these days, it has demonstrated military competence (and will) in Abkhazia and South Ossetia.

    War would turn eastern Europe into a very tempting target to a revanchist Russia.


    If Europe is going to have a “coherent policy”, it’s going to have to be one that doesn’t involve institutionalizing the massive transfer of both goods and cash from the productive North to the unproductive South.

    The incapacity of European leaders to come up with such a strategy is the root cause of their failure.

    The Germans will have to find other customers — customers who actually have money — for their goods. China comes to mind. Greece, if it wants Geman goods, can learn to build businesses that create goods and services that Germans want.

    Anything else is building the world economy on sand.

  • Jacksonian Libertarian

    The European Governments have been living beyond their means for a very long time. That they wish to continue to so, despite the fact that it is time to face the music, does not surprise me.

  • Lucius

    Grim news indeed. If such miserable situation continues, a European-led recession may gain momentum, and that would gravely frustrate China’s effort to manage a economic “soft landing” and America’s long term plan for job recovery.

  • Corlyss

    It’s refreshing to watch Eurotrash lying to each other, even more amusing to watch the pols believe each other’s lies. Seems to me they should land with a splat shortly.

    “Greece, if it wants Geman goods, can learn to build businesses that create goods and services that Germans want.”

    You mean, like, work? Greece is the Maynard G. Krebs of Europe.

  • Cunctator

    Spain has been the great trial waiting to happen. While everyone has been complaining about the incompetence of the Greeks or Berlusconi, few in the media discussed the insipid policies of the Zapatero government in Spain. From opening the gates to ucontrolled immigration (leading to a huge increase in numbers of Muslims) to ridiculous levels of spending to cowardice in the face of terrorist challenges, Zapatero must go down in history as one of the worst leaders in the West since 1945. Spain will be paying for generations for his government.

  • Lorenz Gude

    The most coherent thing I’ve encountered on the European problem is Satyajit Das interviewed by Andrew Horowitz on his Disciplined Investor podcast #250. Das works out of Sidney and has some quite revealing things to say about Das Eurocrisis that I haven’t heard elsewhere – like dear old Germania is broker than we realize.

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