{"id":28692,"date":"2012-03-29T21:19:41","date_gmt":"2012-03-30T01:19:41","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/29\/why-spains-economy-is-the-next-big-problem-for-the-eurozone\/"},"modified":"2012-03-29T21:19:41","modified_gmt":"2012-03-30T01:19:41","slug":"why-spains-economy-is-the-next-big-problem-for-the-eurozone","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/29\/why-spains-economy-is-the-next-big-problem-for-the-eurozone\/","title":{"rendered":"Why Spain\u2019s Economy is the Next Big Problem for the Eurozone"},"content":{"rendered":"

By MoneyMorning.com.au<\/strong><\/p>\n

It\u2019s not often that I feel sympathy for a politician.<\/p>\n

But you have to feel for Spain\u2019s<\/strong> prime minister, Mariano Rajoy. Three months into his government, and he\u2019s facing a general strike from the unions on the one hand, and a potential buyers\u2019 strike from investors on the other.<\/p>\n

The unions are striking because they\u2019re fed up with economic reform that might reduce their power. Investors are threatening to stop buying Spanish government debt because they want even more reform.<\/p>\n

What\u2019s a prime minister to do? And more importantly, what does his dilemma mean for you?<\/p>\n

<\/span><\/p>\n

Spain – The Weakest Link in the Eurozone<\/span><\/h3>\n

Spain\u2019s economy<\/strong> \u2013 more so than Italy\u2019s \u2013 has always been the major fault-line in the eurozone.<\/p>\n

Sure, Greece causes a lot of noise and commotion. There was always the chance that Greece would throw a hissy fit and pull out of the euro unilaterally. Better-behaved small countries like Portugal and Ireland barely warrant a mention in the papers these days.<\/p>\n

Even so, people always knew that in terms of size, Greece by itself didn\u2019t matter<\/a>. It was the knock-on impact that everyone worried about. The big fear was always that the market would say to itself, \u201cIf Greece can go bust, maybe it will be someone who matters next time.\u201d<\/p>\n

So the point of all the bail-out packages wasn\u2019t so much to save the smaller countries. It was to prevent fears about the small countries from spreading to the \u201ctoo big to fail\u201d ones.<\/p>\n

For a short while, it seemed as if the European Central Bank\u2019s LTRO (Long-Term Refinancing Operation<\/a>) had done the job on that score. Now it\u2019s starting to look as though that was over-optimistic.<\/p>\n

Investors are fretting about Spain again. The government\u2019s cost of borrowing over ten years has risen by around 0.5 percentage points since the start of this month.<\/p>\n

The trouble is, Spain missed its 2011 budget deficit target (in other words, it ended up overspending by even more than expected). As a result, it set itself a softer target for 2012.<\/p>\n

Markets don\u2019t like to see this sort of target slippage. For now, they don\u2019t care so much when it\u2019s the US or the UK. Those countries have their own currencies and central banks who are prepared to print as much money as it takes to pay off their creditors.<\/p>\n

Europe isn\u2019t prepared to do that (although it might be getting closer to doing so). And as private investors in Greek debt<\/a> have discovered to their cost, there\u2019s no guarantee that a eurozone country with problems will make good on its debts. So naturally, investors are warier of European government debt than perhaps they once were.<\/p>\n

Spain\u2019s Big Economic Problems
\n\u2013 Debt and Unemployment<\/span> <\/strong><\/h3>\n

The Spanish economy\u2019s big problem is private sector debt, which might end up on the government\u2019s balance sheet. Spain had a massive property bubble<\/a>. The fall-out from that bubble continues. Prices haven\u2019t been allowed to fall as far as they really need to. And that means no one can be sure just how much bad debt is still sitting on the banks\u2019 books.<\/p>\n

When banks don\u2019t know just how bad a state their balance sheets are in, they stop lending. That makes it even harder to dig an economy out of trouble.<\/p>\n

Spain\u2019s economy also has the usual European problem of overly restrictive labour laws that discourage hiring. This is something the government is trying to tackle. The general strike today is partly about an overhaul of labour rules. A new bill passed in February makes it easier to cut wages, reduces the power of the unions, and could cut the cost of firing staff.<\/p>\n

Given that unemployment is standing at 23%, and an incredible 50% among young people, you have to wonder who\u2019s left to go on strike. As one Spanish political communications professor tells Bloomberg, the unions \u201chave a lot at stake as Spanish society is very much questioning their role\u2026 [They] don\u2019t represent the unemployed.\u201d<\/p>\n

This is one of the rarely-appreciated benefits of having a \u2018hard currency\u2019 like the euro. When it\u2019s harder to take the easy way out (allowing your currency to weaken<\/a>) then sometimes you are forced to take genuinely tough measures to change the way your economy works.<\/p>\n

Of course, the trouble is that it takes a strong government to cope with the resulting social upheaval. And if your economy is in such a deep hole that people don\u2019t get to see the benefits of reforms, only the pain, then it\u2019s even harder to push reform through.<\/p>\n

So What Happens Next for Spain?<\/span><\/h3>\n

Spain\u2019s economy can\u2019t be allowed to go bust. And it won\u2019t be. We\u2019re going to see the usual back and forth about bail-out funds and arguing between the Germans and the rest of Europe. But the most likely outcome still seems to be some form of European quantitative easing. The ECB<\/a> has already taken a pretty big step in that direction with the LTRO<\/a>.<\/p>\n

But what does all this mean? The short answer is that the future for Europe holds continued loose monetary policy, and a banking system in many countries that\u2019s largely reluctant to lend.<\/p>\n

John Stepek <\/strong><\/p>\n

Editor, MoneyWeek (UK)<\/strong><\/p>\n

<\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This is an edited version of an article that first appeared in MoneyWeek (UK).<\/a><\/p>\n

<\/em><\/strong><\/p>\n

From the Archives\u2026<\/em><\/strong><\/p>\n

<\/strong><\/p>\n

A Better Inflation Bet Than Gold?<\/a><\/p>\n

2012-03-23 \u2013 Kris Sayce<\/p>\n

3D Printing: How \u201cDesktop Factories\u201d Will Create the Next $1 Trillion Industry<\/a><\/p>\n

2012-03-22 \u2013 Michael Robinson<\/p>\n

How to Invest in the Fastest-Growing Energy Business of the 21st Century<\/a><\/p>\n

2012-03-21 \u2013 Aaron Tyrrell<\/p>\n

Why You Should Build Your Wealth Using the Biggest BRICS Possible<\/a><\/p>\n

2012-03-20 \u2013 David Thomas<\/p>\n

Oil Getting Ready For Its Next Rally<\/a><\/p>\n

2012-03-19 \u2013 Dr. Alex Cowie<\/p>\n

<\/strong><\/p>\n

For editorial enquiries and feedback, email letters@moneymorning.com.au<\/a><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nWhy Spain\u2019s Economy is the Next Big Problem for the Eurozone <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au It\u2019s not often that I feel sympathy for a politician. But you have to feel for Spain\u2019s prime minister, Mariano Rajoy. Three months into his government, and he\u2019s facing a general strike from the unions on the one hand, and a potential buyers\u2019 strike from investors on the other. The unions are striking … <\/p>\n

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