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.