The Financialist: ‘Clearly things are going badly in Spain. But what’s the solution? ‘

28th August 2012

Sky News, along with most other media outlets report today that the Spanish economy continued to shrink in the second three months of the year, as it struggles with a deepening recession exacerbated by tough budget cuts. The country's national statistics bureau said the economy contracted by 0.4% between April and June, following a fall of 0.3% in the first quarter of 2012.

The GDP data comes as reports suggest that Spain's north-eastern region of Catalonia, which represents around a fifth of the country's economic output, will tap a state liquidity facility for just over €5bn.

The Real Surprise? Private sector deposits fell by 5%

But while Spain's economic collapse is well known by now, Zero Hedge  believes the real surprise came from the data released by the European Central Bank (ECB) which showed that private sector deposits fell by 5%, plunging to 1.509 trillion euros at end-July from 1.583 trillion in June as both consumers and businesses rush to withdraw their money from Spanish banks.

"Keep in mind this is after the June 29 European summit which supposedly fixed everything. Turns out it didn't, and the people are no longer stupid enough to believe anything Europe's pathological liar politicians spew."

So clearly, things are going badly in Spain. But what's the solution?

The standard response is to ramp up government spending or as Keynes called it "spending against the wind." Unfortunately, as Sean Maley points out, the Spanish government is doing the exact opposite by reducing spending by 3%.

Cleary frustrated, Maley asks, "Why cut spending, and seemingly make the recession worse?  If the government is the only actor capable of pushing Spain out of depression, why cut spending?"

Spaniards embrace 'bottom-up' solutions

Meanwhile, in an in depth piece for the Wall Street Journal, Matt Moffett and Ilan Brat explain how young Spaniards are increasingly embracing "bottom-up" self-help initiatives to make a living as Europe's leaders struggle to come up with credible solutions to a five-year old economic crisis.

"The diverse measures-some commonly associated with rural or disaster-zone economies-supplement a public safety net that is fraying under government austerity programs. Besides time banks, they include barter markets springing up in barrios, local currencies designed to spur the flagging retail economy, and charity networks that repurpose discarded goods."

And finally, spare a thought for stock investors as Spain's recession woes looks likely to  kill the recent bull run in equities, writes Markos N. Kaminis, a leading Wall Street analyst. "Spanish data is driving the euro region lower this morning, with all major indexes down on the day. U.S. futures started lower on the news as well."


Previously on The Financialist:


Jobs, affordable housing and the recessions unlikely winner

This Chart Sums Up 80 Years of US Energy Policy

Bond Investors Beware

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