Machiavelli should have added a chapter to his book on advice to princes about vacations: Don’t go on safari during a national economic breakdown. If you do, don’t break your hip so you have to be medivaced, from southern Africa back to Europe, in a private jet.Such is the situation for the King of Spain. A few weeks after declaring that the plight of unemployed young people in his country kept him up at night, he was rushed back to Spain after breaking his hip on the way to the bathroom during an elephant hunting trip in Botswana.While the king was out hunting pachyderms (Via Meadia has no word on how many he killed), Spain’s economic outlook continued to darken. The Economist reports:
The 2011 budget deficit was 8.5% of GDP, not the goal of 6%, in large part because of overspending by Spain’s autonomous regions. The economy is in recession—industry shrank by 5.1% in the year to February according to figures released on April 11th. Attempts to cut the deficit by 3.2% of GDP in a year will make things worse. Reforms to the jobs market, making it cheaper to fire workers and easier to set pay locally, will benefit Spain’s economy in time but not now.Anxiety about Spain’s banks worsens the outlook further. A messy end to Spain’s long construction and mortgage boom means a lot of bank loans have already turned sour. More are likely to. . . . Investors fear that the state will be called on to recapitalise Spain’s banks.
In trying to achieve its deficit-reduction targets, Spain might have sabotaged itself in a worse way. Wolfgang Munchau writes in the FT:
Fixing the Spanish crisis will have to start with the banks – and this is a task the private sector is not willing, and the government not able, to perform. The only halfway benign solution I can see would involve a European rescue programme for Spain that focuses specifically on the recapitalisation and downsizing of the financial sector. Spain would also need to undershoot the eurozone’s average inflation rate over many years to redress some of the lost price competitiveness. At the same time, the country needs to go easy on austerity…I can see only two outcomes for Spain. The crisis will end either in a catastrophic Spanish withdrawal from the eurozone, or in a variant of a fiscal union that includes a joint eurozone backstop to the financial sector. If the Spanish government pursues the strategy it has announced to the bitter end, the first outcome will become vastly more probable.
Many investors fear the six percent mark for Spain’s ten-year bond yields. Today, those yields hit 6.15 percent, the highest point so far this year. Spain is back in crisis mode, and not a few Spaniards are probably thinking that a good way to cut the budget deficit might involve sending the royal family back into private life.Presidents are often cheaper than kings.