Austerity Spanish Style

I have blogged heavily on the Euro Zone’s failed, German-mandated, austerity program. Most of the Zone is in technical recession, and among those underperforming PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations who have received EU rescue packages, the assumption remains that cutting national debt at all costs – reducing deficits as the super-high priority – will solve the region’s debt crisis, sooner or later. But as austerity measures drop debt, in many cases the cuts imposed have had an even greater impact on slashing the GDP growth necessary to repay what debt remains. Thus the truly more meaningful measure of the debt crisis – the ratio debt to GDP – has actually gotten worse. In the end, nobody in his or her right mind believes that it is remotely possible for Greece to repay its rescue package or remotely to service its national debt. The austerity programs have killed what limited ability Greece may have had to generate enough GDP to make a difference.

Funny how many American lawmakers, facing a fiscal cliff, also obsess about cutting the deficit and also ignore the true measure sustainable national debt: that debt to GDP ratio noted above. Hmmmm, maybe they don’t care, because what they really want to do is cut government programs they don’t like, and deficit reduction is one hell of an excuse. The problem with that thinking is that too much cutting can have horrible effects on economic recovery. Spain is a perfect if extreme example.

With a real estate crash that actually was a multiple of the U.S. subprime crisis, Spain succumbed to fiscal catastrophe, and went begging to the EU for a rescue package. Between its own economic crush and EU austerity demands required to get the bailout, Spain has mounted a staggering 25% unemployment rate. The seething anger of the masses of unemployed (pictured above) makes the headlines, but some of the “little stories” show exactly how far daily life in Spain has fallen… even for those who remain technically employed. Many Spaniards with jobs often go weeks or even months without getting their paychecks. They’re scared to quit because there are no employment alternatives, sometimes even scared to publicize the shortfall for fear of causing the company they work for to collapse entirely. With over 300,000 bankruptcies in recent memory, their fears are justified.

If they leave their job, they also know that unemployment insurance only extends for two years (assuming that the program remains funded), and no one believes the employment picture will be solved in that time. And sometimes, the lack of paychecks comes from government agencies that have simply run out of money. “Being paid for the work you do is no longer something that can be counted on in Spain, as this country struggles through its fourth year of an economic crisis…  With the regional and municipal governments deeply in debt, even workers like bus drivers and health care attendants, dependent on government financing for their salaries, are not always paid.” New York Times, December 16^th. This non-payment reality trickles down the economic waterfall into a vicious cycle that tanks the economy and accelerates even more unemployment.

The government doesn’t have (or won’t provide) the underlying non-payment statistics. “But one indication of their number can be seen in the courts, which have become jammed with people trying to get back pay from a government insurance fund, aimed at giving workers something when a company does not pay them… In Valencia, Spain’s third-largest city, the unemployment rate is 28.1 percent and the courts are so overwhelmed that processing claims, which used to take three to six months, now takes three to four years… Since the start of the crisis in 2008, the insurance fund has paid nearly a million workers nationally back pay or severance. In 2007, it paid 70,000 workers. It is on track to pay more than 250,000 this year, and experts say the figures would be much higher if not for the logjam in the courts.” NY Times.

We need to be sure in this country that dogmatic pursuit of an economic panacea may well be more destructive to our long-term economic survival that the damage that would occur by not dealing with the crisis at all. There is middle ground, one that embraces cuts with no sacred cows, but one that has a heart and still provides the longer-term investments in education, infrastructure and research that are the necessary fundamentals of long-term healthy economic growth. We need common sense more than ever.

I’m Peter Dekom, and we really need to understand the ramifications of taking actions based on overly-simplistic sloganeering.