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2012-07-12 04:31:20
Jul 11th 2012, 15:24 by R.A. | WASHINGTON
HERE'S some news:
Recession-plagued Spain unveiled new austerity measures on Wednesday designed
to slash 65 billion euros from the public deficit by 2014 as Prime Minister
Mariano Rajoy yielded to EU pressure to try to avoid a full state bailout.
The conservative leader announced a 3-point hike in the main rate of Value
Added Tax on goods and services to 21 percent and cuts in unemployment benefits
and civil service pay and perks in a speech interrupted by jeers and boos from
the opposition...
"This is a clear demonstration of the macroeconomic conditionality that we had
to accept in exchange for the banking aid and in exchange for more time to cut
the deficit to 3 percent," said Santiago Sanchez Guiu, economist at the Carlos
III university in Madrid.
Spain has been given a little more deficit leeway this year and until 2014 to
cut its budget gap to 3% of GDP. There has also been an agreement to provide
aid to Spanish banks from the euro-zone's emergency rescue fund (which also
looks a bit of a raw deal for Spain).
No one will accuse Spain of having a model government budget, but its crisis is
not fundamentally about lax budgeting. In 2007, Spain was running a bigger
overall budget surplus and a smaller structural deficit than Germany. It's
gross debt was just 36% of GDP to 65% in Germany. And as of last year, it still
had a lower public debt level than the Germans. One can certainly argue that
Spain's boom-time surplus should have been even larger to lean against the
capital inflows it was enjoying, but ultimately that wouldn't have made much
difference.
More important, this is incredibly counterproductive. The Spanish economy is
imploding. Without the ability to offset these cuts with a very aggressive
monetary policy, the multiplier on this austerity will be substantial. There
can't be much confidence that this austerity plan will generate any fiscal
improvement given the likely cyclical hit to revenues and the resulting impact
on banks, which could well feed back into greater sovereign obligations. It's
more economic pain for no fiscal gain.
But that doesn't matter, because this is best understood as another bank shot
move toward a crisis solution. The aim is to demonstrate a willingness to
suffer great enough to convince Germany you're worth sharing risks with. So far
the Spanish are game. But a quarter of Spanish workers are unemployed, a number
that has risen 4 percentage points over the past year. One wonders how much
more they'll stand.