With Spain probably in recession, again, and the cost of its government borrowing topping 6%, again, European Commission president José Manuel Barroso is being ridiculed for his optimistic futuring. As the Guardian’s Eurozone crisis live-blog notes
European Commission president José Manuel Barroso has just been quizzed about the eurozone crisis, at a summit on sustainable energy.
Barroso attempted to calm fears, telling his audience that he is “absolutely confident that Spain can meet its econonic challenges”. Alas, Barroso didn’t explain what his confidence is based on, leading to a certain degree of amusement on Twitter. Eg:
Barroso absolutely confident that Spain can meet its economic challenges. Rides off on his unicorn.
Heh. Of course, when it becomes serious…
And as the BBC economics editor Stephanie Flanders points out, Spain, et al, face two Catch-22s
The “austerity” Catch 22 is that tougher action to bring down the deficit will hurt the real economy, and could thus make their debt problem even worse.
The “competitiveness” Catch 22 is that tougher action to make Spain more competitive on world markets will almost certainly squeeze the cash value of the economy, which (you guessed it) is likely to make their debt problems even worse.
Here’s the conclusion that Goldman Sachs draws, on the basis of its extended analysis:
“Our results suggest that, for some euro area countries – notably Greece and Portugal, but arguably Spain as well – the task of regaining fiscal and external balance through cyclical adjustment alone appears large, to the point of being insurmountable.”
Or, to put it another way, these governments may well be damned if they do, and damned if they don’t.
The week has only just begun…
The Spanish Treasury has confirmed this lunchtime that Spain will attempt to raise up to €5.5bn of debt this week.
The first test will come tomorrow, when Spain will auction between €2bn and €3bn of 12 and 18-month bills.
Then, on Thursday, it will auction between €1.5bn and €2.5bn of two longer-maturity bonds, which must be repaid in 2014 and 2022.
At which point I’m reminded of a recent FT column by Wolfgang Münchau, noted previously
The markets have concluded that the eurozone crisis has ended. Several politicians said that they, too, believed that the worst was over. Complacency is back. I recall similar utterances in the past. Whenever there is some technical progress – an umbrella, a liquidity injection, a successful debt swap – optimism returns.
If you think the European Central Bank’s policies have “bought time”, you should ask yourself: time for what? Greece’s debt situation is as unsustainable as ever; so is Portugal’s; so is the European banking sector’s and so is Spain’s. Even if the ECB were to provide unlimited cheap finance for the rest of the decade, it would not be enough. [added emphasis]
And, as I may have mentioned, “the political trilemma” remains unresolved…
Adds There is an additional wrinkle in Spain
The prime minister has this month presented a budget with €27bn of tax rises and spending cuts in the central government budget, but the key to meeting targets lies in the regions. Last year they failed to cut any of the €17bn they were asked to find. This year they have been set a savings target of €15bn.
The socialist government of José Luis Rodríguez Zapatero, which lost elections in November, had claimed until the end that the regions were under control. The finance minister Elena Salgado even claimed the regions had produced a budget surplus during the third quarter.
But Spain was off track. It had promised its national deficit would drop from 9.5% of GDP to 6%, but turned in an 8.5% deficit that made it the laughing stock of austerity Europe – and left Rajoy’s new government having to clean up the mess, which also includes 24% unemployment and a recession that will shrink the economy by 1.7%.
The regions provide the key amenities of the welfare state, such as health and education, so regional austerity means cuts to basic services. Protests have been loudest and, on occasions violent, in regions that managed some deficit reduction last year, such as Catalonia and Murcia.
Spooked by market pressure, Rajoy last week announced a further €10bn in health and education “savings”, which will be implemented by the regions. On Thursday, the government passed a law that allows it to take control of the finances of regions that fail to stick to the austerity plans .