Austerity is not the Answer

Relentless austerity will only deepen Greek woes – FT.com.

The article starts with this line:

We have reached a point where the policies adopted to resolve the eurozone debt crisis are causing more damage than whatever may have caused the problems in the first place.

I agree with the statement but not the timing. This point was reached long ago. When Greece was supposedly bailed out in March, commentators were already saying that Greece would need another bailout. They rightly observed that the austerity conditions were causing a deeper depression and resultant higher budget deficits.

In economics we learn about the multiplier effect in our first college classes, and this effect works in reverse, too. Every dollar that is cut from government spending results in more dollars leaving the economy. It really is that simple. This is the present situation in Greece and now Spain.

Note that Spain’s budget deficits are growing with austerity pledges, i.e. budget cuts. These bullet points are from a blog post I wrote in August about the growth of Spanish budget deficit projections:

 

  • 4.4% in March raised 1.4% to 5.8%.
  • 5.8% in May raised .5% to 6.3%
  • Still officially 6.3% in August but running at a rate of 8.1% for an increase of 1.8%

https://dareconomics.wordpress.com/2012/08/28/spain-will-request-a-bailout/

Now, the reputable website Trading Economics has the projected budget deficit for Spain as 8.5%. Even this conservative figure is nearly twice what the Spanish finance ministry projected just six months ago!

Unfortunately, Spain has entered the ouzo zone: official lying about the true extent of the crisis coupled with worsening budget deficits and a deepening depression.

The Spanish finance ministry is forecasting a mere 0.5% decrease in GDP next year. This is not based on any evidence but just a desire to make the numbers look better.

Additionally, they keep prevaricating about the banking sector. The same “independent” auditors who gave Irish Ally bank a clean bill of health just months before it collapsed also claim the Spanish banking system needs only €60bn to right itself. I do not profess to know what the eventual tab will be for a Spanish banking system bailout, but look how far the Spanish property bubble still has to deflate:


(For comparison, the grey line is the American housing market)  Many more dodgy loans will go bad in the coming months based on this chart.

There is a reason that de Guindos is lying about the banks health. A real audit pursuant to a troika bailout will lay bare the real situation, and Spain will collapse, just like Greece.

The only way out for both Spain and Greece will be a euro exit. The political situation may not allow for this, but it also does not allow for several more years of depression.

 

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