First stop Greece, next stop Spain
The austerity express may have already left the station in Greece but the pain train bringing massive fiscal cutbacks arrived in even greater force in Spain this past week. Unsurprisingly, austerity is just about as popular in Spain as it was in Greece – inciting violence, riots and general strikes in Barcelona and other major Spanish cities last Thursday. Protests erupted just before the announcement in Madrid of the biggest public sector cutbacks since Franco, Spain’s erstwhile right wing caudillo.
The Spanish government introduced a mix of spending cuts and new taxes amounting to roughly 27 billion euros in public sector cuts. The Spanish government plans to raise corporate tax rates, which will augment higher income and capital gains tax rates already implemented in December. Civil servants will see pay increases stop and consumers will pay higher fees to use electricity and gas. To be sure these are tough pills to swallow, especially in a weak Spanish economy suffering unemployment levels above 20% – the highest in the eurozone.
Tensions flared Thursday between the estimated 800 thousand protesters and riot police, causing injuries, detentions, and burned trash containers. Despite these disruptions Spanish officials have remained steadfast in their commitment to austerity.
Economy Minister Luis de Guindos, commenting from Copenhagen, said “Spain is going to stop being a problem, especially for the Spanish people but also for the European Union.” The new conservative government, less than 100 days old, has put concerns over the debt at the top of their priority list.
De Guindos and his government’s main concern is averting a financial disaster. The danger of rising interest rates on government bonds threatens total economic collapse. The bond yield on ten year Spanish bonds was at 5.4% last week though it was only 4.96% just a month ago (the US is about 2.2%). If investor confidence is shaky borrowing costs soar, something already witnessed in Greece where rates on government bonds exploded. When borrowing costs go up financing becomes very difficult if not impossible, particularly in times of sluggish economic growth and falling revenues.
But Spain’s situation, like that of Greece, is soon to be repeated throughout the Eurozone. Like it or not the austerity express is scheduled for trips to Italy, Portugal, Ireland, and even France and Germany. Even said, the eurocrats continue to discuss still more bailout funds with plans to combine ESFS (European Financial Stability Facility) and ESM (European Stability Mechanism) funds while others are pushing for greater IMF lending capacity all in the hopes of strengthening the euro “firewall.”
Meanwhile, across the Atlantic conservative lawmakers in Washington continue to fail to make any headway with major budget reform. House Republicans like Representative Paul Ryan and Congressman Jim Jordan of the Republican Study Committee have put forth viable proposals that could prevent a financial crisis in America, but none of them have any chance of passing.
Plus, as long as prominent Keynesian economists like Paul Krugman and Larry Summers continue to demote budget problems as “long term,” many Americans will remain convinced that Washington’s fiscal problems are remote from what is happening in Europe – an utter fallacy.
Ironically, instability in the Eurozone has been a source of strength for America’s bond markets thus far, making them a safe haven for investors fleeing Europe. However, that blessing won’t last long. What very few people in the Eurozone and in the US realize is that the game is over, the markets have already decided. As such the developed countries of the world face a very difficult choice: painful austerity now or financial catastrophe later.
Cameron Macgregor is a USNA grad and former Naval officer. He is writing his first book America Resurrected.