3rd January 2012
The New Year in the Euro zone has opened in rather an odd manner. Firstly its politician’s gave a very downbeat message for 2012 with Chancellor Merkel of Germany saying 'next year will no doubt be more difficult than 2011'
This was odd in itself as of course they have told us so many times that they have solved Europe’s problems! The mainstream media missed that point. Perhaps it was some form of Freudian slip by Chancellor Merkel. However markets completely ignored them and if we look at the German Dax equity index rose by 3% yesterday and have risen by 1% so far today. One could speculate that financial markets have got so used to political dissembling that they have assumed things are more optimistic! Or simply that they no longer take any notice.
Spain is in trouble
For some time I have been writing that the trajectory of the Spanish economy is poor and the outlook weak and over the New Year period and even today we have received new information on this front.
The Budget or Fiscal Deficit
The previous Spanish government told us that it was on target to hit a fiscal deficit of 6% of Gross Domestic Product in 2011. However a spokeswoman for the new Spanish government Soraya Saenz de Santamaria told us late last week that the deficit would now be 8%. This has become a rather familiar trend after elections in the Euro zone and according to El Pais this has continued this morning as Spanish Interior Minister Jorge Fernandez Diaz has said it will be 8.2%.
This has become such a repeating trend I am thinking of defining austerity as being defined in Europe as an increase in fiscal deficits rather than a reduction for my new lexicon of terms in economics.
The usual response: more planned cuts and higher taxes
The government now plans a 14.9 billion Euro austerity package which combines some 8.9 billion Euros of spending cuts with 6 billion of tax rises ( income tax, capital-gains tax, and property tax). The tax increases will be “temporary” in what is another entry for my lexicon ( for newer readers official uses of the word temporary usually explain something which turns out to be anything but).
If we assume that the plan above is actually enacted we see moves which will reduce Spain’s fiscal deficit by 1% of GDP. This leaves her with a problem as she is supposed to hit a fiscal deficit level of 4.4% of GDP this year and 3% in 2013. So if we start at 8.2% and subtract 1% we get a long way short of 4.4% which means that Spain will have to turn the austerity screw a lot harder if she is to get anywhere near these targets.
The problem here is something I have reported on many times. Spanish regional governments have a higher share of total public spending than is usual elsewhere and they have failed to cut spending as promised. This is often missed by statistics headlines which only report central government numbers.
However if we move onto the Spanish economy we will see as I demonstrate below that there are real dangers of a substantial slowdown which will only exacerbate the fiscal deficit problem. Indeed we are in danger,in my view, of the vicious circle of missed targets,spending cuts and tax rises, and then a shrinking economy leading to more misssed targets and repeat. In other words what has happened to Greece and looks like is happening in Portugal.
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