Spain and its economy needs a change of tack rather than a deficit plan hiatus

Overnight has come a leak of the expected news that Spain is to get a stay of execution on its efforts to achieve the Euro area fiscal (public-sector) deficit target of 3% of its economic output. The Financial Times has reported it thus today.

In its annual verdict on national budgets of all 27 EU members France, Spain and the Netherlands will be given a waiver on the annual 3 per cent deficit limit.

It is expected that the waiver will last for two years. The alternative was that Spain would have been fined this year by the European Commission for failing to hit the 3% target and the fine could have been up to 0.2% of her economic output. The system of fines always was somewhat bizarre as they meant that if you exceeded your deficit target the European Commission came along and made your problem larger! If you think about it the whole system simply lacked credibility as it was never likely to be enforced.

Meanwhile the ongoing economic depression in Spain means that the fiscal deficit in Spain will be at least double the 3% target this year. Also there has been little sign of the economic reforms that the European Commission and indeed the Spanish government has continually trumpeted.

What about the Euro area rules?

There is a clear problem as having set a system based on a fiscal deficit target of 3% of Gross Domestic Product and a national debt of 60% of GDP the European Commission is in effect abandoning it when the going gets tough. Of course France and even Germany have ignored it before.

What about Greece,Ireland and Portugal?

Citizens of these countries may well review this news with dismay. After all their economies have been sacrificed on the high altar of Euro area austerity and yet apparently plans have changed later. They may well consider that like banks some Euro area countries are too big to fail.

Back to Spain

There was also something of a Spanish twist to this as we see how the Financial Times covers the views of the Spanish Prime Minister.

Mariano Rajoy, called on the EU to change its deficit procedure so countries would no longer be penalised for spending money

Actually I am being slightly unfair on him as he did in fact add “on fighting youth unemployment” but you get the idea of the fantasy world which is in play here.

What is the state of the Spanish public finances?

This release from the Finance Ministry gave us a clue yesterday.

The State ended  April 2013 with a deficit in terms of national accounting of 25.007 billion euros, 1% higher than in the same month of 2012, which equivalent to 2.38% of GDP.

So for Euro area austerity up is indeed the new down!

As we grimly review yet another failure for this policy we see the main cause tucked away in the detail.

Tax revenues,  were 26.787 billion Euros or 5.3% less than in 2012.

It was bad enough that taxes on income were down by 4.1% but this was fall exceeded by a fall in Value Added Tax (sales tax) revenues of 9.9%. This gives us one more measure of the collapse in domestic demand which has taken place in Spain. In spite of the rises in tax rates the revenue collected is down as we see the effect of the Laffer curve apply one more time.

All this was summarised by the newspaper Libre Mercado thus.

The Government has the largest deficit in its history to April

What is the latest update on domestic demand in Spain?

This morning has seen the release of the retail sales numbers for April by the Spanish statistics authority.

If you remove the seasonal and calendar effects, the annual rate recorded a variation of -4.7%,

This was a better performance than March as sales rose by 0.5% on a month on month basis once adjusted for both calendar and seasonal effects but we see that the annual figures are still poor. Even worse this comes on the back of falls in both 2011 and 2012 for this measure and so the underlying volume index is at 83.2 where 2010 =100. So the cold winds of an economic depression have been blowing strongly through the Spanish retail sector.

The sense of gloom has been added too by the May bulletin from the Bank of Spain which shows that the level of domestic demand in Spain has not only been falling since mid-2010 but that it still appears to be accelerating.

As an aside I think that such numbers provide some perspective on the current debate about the state of the UK high street.

The mortgage market

We might perhaps have some hopes of a beginning of a turn for the better here as the Bank of Spain tells us that its measure of mortgage rates fell from 3.74% in March 2012 to 3.22% in March of this year. Although one may be troubled by the fact that they have risen since the 2.93% of December.

However volumes and prices show no sign of responding.

The number of mortgages constituted on dwellings stands at 16,270, 34.1% lower than that registered in March 2012

In the case of mortgages constituted on dwellings, the average amount was 96,676 euros, 6.7% less than in March 2012 and 6.7% lower than in February 2013.

The value of the mortgages constituted on urban properties was almost 2,866 million euros indicating an annual decrease of 34.2%, as compared to March 2012. On dwellings, the capital loaned almost reached 1,573 million euros, 38.5% less.

Such numbers are rather like those produced by Greece where the numbers are so weak that you start to wonder if a recovery on that basis alone is due, but it never seems to come. Instead we just get further falls and Spain looks headed to be in the textbooks for one of the most extreme housing booms and then busts ever.

How is this affecting the Spanish banks?

The Bank of Spain is investigating how the Spanish banks compile their numbers for doubtful loans which as I pointed out on May 17th has climbed over 163 billion Euros. According to leaked emails published by El Mundo the Bank of Spain feels that there are “weaknesses” at Santander and BBVA and I think we know by know where that one is going.

So sooner or later there will be reports of more provisions as the housing and business recovery they are no doubt hoping will come to the rescue of this can-kicking strategy shows no signs of actually arriving.

Also whilst mortgage rates have fallen on a year ago we see that interest-rates on unsecured credit and loans to business have edged higher which contradicts the official spin. It also tells us that bankers are alike and that international boundaries do not change their behaviour.

Even the OECD has spotted there is an ongoing problem

Today’s forecast from the Organisation for Economic Co-operation and Development will not make for happy reading in Madrid. It predicts a 1.7% contraction in the Spanish economy in 2013 and adds this kicker.

The unemployment rate is expected to rise above 28%

There will be some relief in Madrid that this forecast does confirm to my rule that next year is always bright (until you get there….). Spain is forecast to grow by 0.4% in 2014 and in case you were wondering it will be driven by an acceleration in her export growth. To whom? You might reasonably wonder….


Back on the 17th of this month I took a look at the economic situation in Spain and concluded this.

What she needs is the ability to set her own interest-rates and monetary policy rather than getting what suits Germany.

As we review the economic data since then we see that nothing has changed in her retail and housing sectors. Also in spite of the fact that the OECD seems to think that a policy that has yet to convincingly work when it has been tried (QE) would help the Euro area it remains true that the one monetary weapon available an exchange rate depreciation is blocked by her Euro area membership.

So whilst I welcome the proposed delay in achieving her fiscal targets I fear that Spain may be exchanging a problem now for a more drawn out one.


This entry was posted in Banks, Euro zone Crisis, General Economics, House Prices, Quantitative Easing and Extraordinary Monetary Measures and tagged , , , , . Bookmark the permalink.
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  • Anonymous

    Shaun, The fact that Spanish banks chose to roll over more than 200 billion Euros of loans to property developers, that were coming due, tells me an lot about the state of Spanish banks and their attempts to hide / postpone the inevitable. Officials are saying that another 10 bil may be needed – meaning that banks have a 95% bad debt provision?! The fact that Eurocrats praise Spain for their progress is an insult to the suffering of the Spanish people. They claim that Spain and Greece are ‘on track’ – but for what?

  • Justathought

    Hi Shaun,

    Indeed the Spanish situation is grimmer… I cannot see, Spain reaching 3% budget deficit, maybe in a thousand years within the current state of affairs … The collapse of this monster call Eurozone is on track (at last!); but how much “self-inflicted” suffering (people voted for it).
    Germany is waking up, she is starting to realise that she is also toasted as suggested by the following video.

  • Anonymous

    I accidentally posted before I was finished! I was going to add that the PP party and the P.M are mired in a major corruption scandal that must mean new elections soon. I cannot believe that the Spanish would vote Rajoy back in so we may see a change of policy through political change. Whoever is in power has very little wriggle room though so ‘more of the same’ may be the outcome.

  • Anonymous

    It also tell us lots about the “secured assets” that the Spanish banks hold. The banks would quickly seize and sell liquid assets, hence I suggest they hold a load of unsaleable junk.

  • Anonymous

    Catastrophic problems need decisive solutions. A good politician ought to be able to sell a plan to default, devalue and leave the eurozone.

  • Mike from Enfield

    Hi Shaun,
    How do you view the wider picture?
    A theme running through all your blogs is that whatever country you choose, with the possible exception of Iceland, we see exports down, retail sales down, real wages down, unemployment up… The ‘Market’ is not going to correct any of this – governments simply won’t allow it – and barring some game-changing new technology akin to the invention of the wheel or the discovery of fire then there seems to be no mechanism to counteract it.

    That being the case, can we extrapolate some point where things simply have to improve or do you think there is no other way than a complete implosion? I don’t just mean the end of the Euro, say, but truly radical political change (I’m not using ‘radical’ in the Tony Blair sense). More specifically I feel uneasy about what is happening in the UK. Our economic situation – although far from great – seems to rest largely on being perceived to be less of a basket case than the alternatives. Are we inevitably heading for an ever-bigger fall with very nasty consequences?

    What is your most optimistic prognosis?

  • Anonymous

    However, sitting here in sunny Spain and reading the newspapers, I don’t get much of a sense of urgency. OK, that’s normal here, but I get the strong impression that Rajoy is waiting for someone else to solve his problems. That’s how things work in the EU. He doesn’t want a direct bail out but is happy to accept the indirect. The arbitrary deficit and borrowings limits have been arbitrarily relaxed (as was clearly expected from the start; Europe is also PR-driven) but not a lot has been done to sort out the fundamentals, of which we are all aware.

    One of those is the state pension scheme. It’s not all that well known, but Spain has a much better state pension scheme than the UK. The average payment is €855/month (and there are 14 pay-months in Spain) and in the past that amount has been rigorously linked to inflation and, during the recent socialist reign, updated in real terms at least twice. I can think of quite a few UK pensioners who would like to have a pension of £200/week for only 15 years of contributions! That’s about one third more than the UK government’s latest proposal that comes into force in a couple of years. But then Spain has a fund for pensions, unlike the UK, a telling fact (though recently they have been using some for other things, promising to repay later).

    The latest proposal from the ‘wise men of state pensions’ here is enshrined in a complex-looking formula, but no real terms reduction is foreseen, despite longer lives and many more pensioners, just a reduction in the rate of real increase or a stationary value at worst.

    My points are: (a) Spain can afford to have a very decent pension for its elderly. The revisions published this week do not affect that. (b) the Spanish government is not really doing anything to threaten that and (c) one way or another, Rajoy is looking for external funding of a state that can manage much better than we can to look after its people. Why do the EU let him get away with that?

  • Anonymous

    I think the populations of Greece and Spain have been frightened by all the talk of disaster that would follow leaving the Euro that, at the moment, they would not support it. Even among the enlightened Greeks and Spaniards I talk to the consensus is ‘better the devil you know’ plus a hope that somehow the living standards of the good years will return and all they have to do is grit their teeth and hang on for a few years while problems work there way out of the system. Like ‘Mike from Enfield’ above, I think that there has been a huge irreversible change that, barring some miracle, is in fact the face of the future. Not a sudden dramatic collapse (but you can never rule that out in the Euro zone) but a slow decent to fiscal entropy.

  • Justathought

    Hi Mike,

    It does not matter the sophisticate level of that any civilisations can reached. The hardest facts were and will always be of two limiting factors …food and energy.
    Is UK and the EU are energy and food self-sufficient?
    We already know that UK energy supply nearly collapse in March 2013 and that UK is food deficient for 2013. We must recognise that without trades to sustain our level of energy/food consumptions we are living in utopia. We are still importing many resources to produce goods that will turn to waste within years. In fact we are only transforming valuable resources into waste… and many countries around the world can do the same cheaply.

    People still living within the framework of the 19 century mentality,
    future might be bleak and frustrating however “forward” thinkers are seeing countless opportunities…

    Doesn’t agent Smith, thought provoking unveil some truth, does he?

  • MS

    The thing is that this is really a damned if you do, damned if you don’t, spot. If you maintain the eurozone as is, you will eventually strangle the whole eurozone economy, and if you break up the eurozone, you probably destroy the european union and quite possibly even cause the segmentation of whole countries. Some of my contacts in Italy for instance think that if the EZ were to break up, it’s not unthinkable that among the ensuing chaos Italy might split into two or more separate countries.

    If any country was inclined to make a controlled eurozone exit, it would have happened some time ago already and the window is quickly closing for ‘controlled’ exits. The longer you wait, the more likely you are to have a disaster on your hands.

    The only other option is to ‘fix’ the eurozone, but I see no attempt being made to fix anything at all. Quite literally, the only thing they’ve been doing is giving out loans while shoving austerity down countries’ throats. I think even a bat could see how effective it has been. Nobody wants to fix any of the structural problems , or even implement some policies to mitigate their effects.

    So basically these are the options:

    1) Maintain the status quo (current route & highway to hell)
    2) Controlled eurozone exit (not happening)
    3) Disorderly eurozone breakup (exit route from hell — leads to chaos)
    4) Make some serious reforms, on both national and european levels to fix the EZ (I will eat a hat if this happens)

    Maybe we should make politicians bet their own money on how well the economy will dowhen they go into office. Might make them think twice about destroying economies.

  • MS

    Politicians could easily reverse all the euro-exit-phobia if they wanted to — after all, they caused it in the first place. With the media being what it is nowadays, it wouldn’t take much effort at all to change public opinion. You could almost say whoever controls the media controls public opinion — just look at Mr Bunga Bunga. The only problem is there are no politicians who want to leave the euro…

  • MS

    Able to, yes. Willing to, no. There’s plently of good politicians — people good at politics, that is. I think we need some bad politicians, not good ones. Too bad the good ones are the ones who typically win elections.

  • Justathought

    Hi MS,

    Indeed, I agree with your comment and it seems that the
    frightening suggestion read a couple of days ago might be where we are heading ….
    120 Millions Europeans about ¼ of the EU population are going into the oblivion of poverty and destitution.

  • MS

    What a mess this is. If I were a young European I’d be looking for the exit right now.

  • Patrick

    As someone of great wit pointed out on here a few months back, there’s a missing apostrophe and some northern intonation missing in that claim…

    I believe it’s “on t’rack”

    (apologies to original comedian)

  • Anonymous

    Plenty of young Irish have already left for Bondi & Calgary. This makes the demographics worse and the debt repayment harder for those who remain.

  • Anonymous

    There are politicians who want to leave, from German economics professors to Italian comedians, but it’s the rise of New Golden Dawn that ought to worry Barosso & Van Rompuy

  • Anonymous

    Hi Patrick

    I must have missed that at the time so thanks for reminding me. On t’rack works much better than on track…..

  • Anonymous

    Hi MS

    I was interested in your break-up of Italy point. Do you not think that the economic problems she has now might lead to pressure on her union anyway? Like the example of Catalonia and Spain….

  • Anonymous

    Hi Mike

    If we rule out the “something wonderful” of the film 2001 then I feel that the unwillingness of the world’s political class to accept what you might call the new reality will hold us back. Accordingly the danger is that like Japan since 1990 we see progress turn into false starts and false dawns.

    Moving to the UK specifically we do have strengths and we will probably seem some growth in 2013 unlike many of our neighbours. But as soon as some optimism appears we see something like the retail sales report from the CBI today which was poor.

    But is that so bad? Or let me put it another way,why should we always have economic growth?

  • Anonymous

    Hi Barncactus

    Perhaps Rajoy is gambling that Spain is too big for the Euro area to let it fail. Actually if you start to do the numbers you come to the conclusion that he may well be right!

  • Andy Zarse

    No need to apologise… Originally me I think, wI’ me tales of the lads Barrowsow and t’Rumpy singing on Lisbon Moor bhat’at. As Geoffrey Boycott would say, ah cud get a better debt t’geedeepee ratio wi’ a stick of rhoooobarb…

  • MS

    Ones who are in power, I meant. Still, I would be far more worried about Golden Dawn if I were a Greek citizen than if I were a eurocrat.

  • MS

    That is certainly true, but if you let the economic problems fester for another few years and then add a eurozone collapse to that…