There is only bad news emanating from Spain. The country is ensnared in a debt trap, which may be explained with the aphorism , “the more the debtor pays the more he owes.” In the present situation, Spain has enacted austerity in an attempt to right its fiscal condition. Considering this term in light of your household budget, Spain is merely cutting back its spending.
When you budget your expenses against your income every month, you want to maintain at the very least a zero monthly deficit. Outlays for shelter, food, savings, clothing, healthcare and entertainment should not exceed your monthly income.
A monthly budget is a very simple concept that every responsible adult learns from his parents and from his initial experiences after leaving the nest. If your income decreases, you cut back. Maybe you don’t go out to dinner as much, or you keep that old winter coat an extra year. By decreasing your spending, you get by.
Budget cuts do not work like this in the complex system that we call the economy. Economists talk of the multiplier effect, and it is a simple concept. When Spain spends a euro, it becomes someone’s income. That person spends the euro, and it becomes another’s income and so on.
But the system works in reverse, too. If Spain cuts that euro from its budget, all of the spending down the line that would have occurred disappears from the economy. This dynamic is problematic, because Spain is relying on these transactions for tax revenue. The disappearance of that single euro leads to tax revenue decreasing. Therefore, Spain must cut its budget even more in an attempt to balance it, which again leads to additional decreases in tax receipts and so on.
This is not a theoretical proposition. Look to Greece to see what the true effects of an austerity plan are. Over the last two years, we have observed that the more Greece cuts, the more it owes. Spain has been caught in the trap, and there is only one way out, a default.
Before I explain to you default, I must warn you that I am about to use Latin, and it will suck. Anyway, when you exceed your household budget for too long and can no longer afford to pay your credit card bills, you will stop paying them, which is called a de jure default. “De jure” is a Latin term which means “of the law.” You signed a legally-binding contract with the credit card company where you promised to pay the debt. If you cannot, you have legally defaulted, and the credit card company will pursue a case in the legal system to collect on the debt. A de jure default is the only way that a private entity welches on its debt.
If you are lucky enough to be a sovereign state and not just a guy who lost his job, you have another default option available to you. This is known as a de facto default. In Latin, this means a default in fact. While the country still pays the debt, it pays it in a devalued currency. Legally, the country has not breached the agreement between itself and its bondholder, but because the bondholder is getting back less actual money through a cheaper currency, the situation is still considered a default.
The United States has a long history of maintaining its creditworthiness starting with the assumption of the Revolutionary war debts from the states in the late 18th century.
In 1933 the United States was out of money and in danger of defaulting on the national debt. Once a country legally defaults, it carries that stigma for decades. A de facto default is treated differently.
Rather that writing down the outstanding amount or refusing to pay it outright, the government elected to devalue the dollar by resetting the price of gold from about $20 per troy ounce to $35. With the stroke of a pen, the debt was now 30% less. The next time that someone tells you that the United States has never defaulted on its national debt, you can reply that it just has never legally defaulted.
The United States is not alone among the Western democracies in using a currency devaluation to reduce its indebtedness. Every currency in existence has been and continues to be devalued.
This option is currently not available to Spain because it no longer has its own currency. It shares the euro with 16 other nations. If you are a rich country, you get a weaker currency than you deserve. A poorer country gets a stronger currency that it should, and there you have the current problems of Spain, Italy, Ireland, Greece, Portugal and Cyprus.
A stronger currency makes these countries’ economic output more expensive to the rest of the world, so they are able to sell less of it making them less well off. Bad news for these countries is good news for Germany, Austria, the Netherlands and Finland. A weaker currency, still the euro, makes their economic output cheaper to the rest of the world, and they sell more of it making them better off.
In a standard currency union like the American dollar or the British pound, fiscal transfers blunt the effect of a strong currency. If oil prices are low, Texas cannot devalue the dollar to make WTI cheaper to sell more on world markets. However, fiscal transfers from the rest of the country soften the economic hardship Texans feel from now having a dollar too strong for their economy. Money from unemployment benefits, welfare, Medicaid and infrastructure projects rushes in to replace some of the money lost from the strong dollar.
We can have a fiscal union in this country, because, despite rivalries between the states, we are still one people. People from the Bible Belt may view us New Yorkers suspiciously, but attack the World Trade Center, and see what happens. Those Bible Belters get pissed and have no problem spending billions of dollars to rebuild downtown Manhattan.
Europe does not have the necessary fiscal union, because there is no such thing as Europe. Germans do not feel the same bond towards Spain as New Yorkers feel towards Mississippians even though the geographic distance in both cases is similar.
To me, Mississippi is part of the United States. To a German, Spain is a nice place to visit in August. You can see with the Eurocrisis that the Germans and the other northern countries talk of a united Europe is just talk. When it comes time to put their money where their mouths are, they do nothing but prevaricate.
Spain deserves better. If the eurozone is not willing to mitigate the effects on Spain and the other crisis countries from using a currency that is too strong for their individual economic situations, then these countries need to leave the eurozone.
I see that my Spanish brothers and sisters are protesting by surrounding their Parliament in Madrid. If the bastards let you people in, ask them why you still belong to an ill-fitting currency union. The reason is the same reason why poor men fight wars that rich men start. The ambitions of the elite ruling class come before those of the people.
Your politicians are members of the cult of the euro. The cult sees the common currency as a path towards an eventual United States of Europe. Another layer of government means more political positions and therefore more jobs for politicians. With the way things are going right now, they’re going to need them.
Look at all of the pain that remaining within the straitjacket of the euro has caused in your own country. It can get worse; see your future under the euro and austerity in your Greek allies.
The way back to economic growth is clear, but you will need to press your leaders to abandon their own self interest and begin working for the people.
Spain must leave the eurozone and begin using the peseta. Quite conveniently, you already have a king to place on your banknotes and coins. Perhaps, the time he spends sitting for official portraits for the new money will save the lives of a few elephants.
Using the peseta will immediately reduce the country’s debt burden, and it will help the country out of the debt trap. If the country runs up higher debts in the short-term, the peseta will devalue more leaving the debt burden essentially the same in real terms.
There are downsides to reintroducing the peseta. The people’s own savings and holdings of both public and private domestic debt will decrease in value. Inflation will also increase making foodstuffs and oil more expensive. The proposed plan may be simple, but it is not easy.
In addition to devaluing debts, the cheaper peseta will spur more sales to foreigners and reduce purchases from foreigners because you will not be able to afford as much of them. This cause a trade surplus that will drive economic growth.
In order to fully take advantage of a weak currency, Spain needs to reform its economy. When I write “reform,” I mean remove all of the red tape. Make it easier for businesses to hire and fire workers by reducing job guarantees. Strict labor protections favor those with jobs over those without. When the people without jobs reach a critical mass, protests begin and lead to political instability. Foreigners do not visit or invest in politically unstable places unless they have a lot of oil. You don’t.
Red tape exists in the other byzantine regulations that Spain has in its economy. If you make it easy to open businesses, people will open businesses. These new enterprises will require additional employees, services and materials. The vicious circle of austerity has now turned into a virtuous circle.
So that’s the plan: devalue and reform, simple in conception but challenging in execution. I believe that the people of Spain are up for the challenge. It is up to you to force your politicians to act.