Spain's only hope is to abandon the euro
The currency set off an uncontrollable boom but the country now faces an uncontrollable bust, writes Ambrose Evans-Pritchard.
The mind goes numb. Spanish unemployment jumped by another 237,000 people in the first quarter to 6.2 million, or 27.2 per cent.
The country is losing 3581 jobs a day. There are 1.9 million households where no member of the family has a job.
The unemployment rate has reached 36.8 per cent in Andalusia, Spain's most populous region. The rate of unemployed youth is 57.2 per cent, rising to 70 per cent in the Canaries.
This is in spite of mass emigration by Spanish youth. El Pais reports that 260,000 young people aged between 16 and 30 left the country last year. A great number have gone to London. Others have gone to Germany, or the Persian Gulf, or further afield. Such is the Spanish diaspora, unseen since the mass exodus after the Civil War, or the Conquista.
Nothing like this has been seen before in modern times. Spain's jobless crisis in the 1930s was much milder, and for a good reason. Spain was not strapped by the deflationary disaster of the interwar Gold Standard. It went its own way.
The government of Prime Minister Mariano Rajoy said this week that the crisis is "dramatic" but insisted that the country has regained the confidence of the financial markets and is at last on the road to recovery. Sadly this is not the case. The bond vigilantes have been quiet only because the European Central Bank has promised to backstop the Spanish debt market. The crisis in the real economy is getting worse.
Public debt jumped from 69 per cent to 84 per cent of gross domestic product last year, and only part was due to the bank bailout. That is a big jump in one year and it understates the actual debt. David Owen, chief European economist at Jefferies International, says the real figure is 113 per cent once trade credits and unpaid bills are included.
The deficit rose from 9.4 per cent to 10.6 per cent last year (or 7 per cent without bank costs). The International Monetary Fund expects it to remain stuck at 6.9 per cent in 2014. The improvement is glacial. It has echoes of Greece, and Portugal. The economic damage caused by the austerity cuts is eroding tax revenues, feeding a downward spiral. Household consumption is collapsing, and so are house prices.
As usual, there is much anguish, and complaints against "ultra austerity" and the ECB-European Union-IMF troika (hardly the issue in Spain). The unions talk of a "national emergency". Yet almost nobody in Spanish public life is willing to admit that the cause of all this grief is the structure of monetary union itself.
The euro led to negative interest rates of minus 2 per cent in Spain earlier in the decade, and set off an uncontrollable boom. The country now faces an uncontrollable bust. The elemental issue is loss of sovereign control over its exchange rate and monetary policy.
I am surprised that a great historic nation should put up with 27 per cent unemployment, or accept vassal status to an incompetent and dysfunctional European monetary union regime. Does anybody in Madrid think that EU officials in Brussels actually know what they are doing? Or that the monetary provincials in Frankfurt are much better? Or that the eurogroup is a civilised organisation after the way it treated Cyprus?
The EU project is of course motherhood and apple pie in Spain. It is interwoven in the public thinking with the arrival of democracy after Franco and the re-entry of Spain into the European mainstream. The Brussels subsidies for a quarter-century created a dependency culture, and warped the Spanish mind.
Well, minds can be unwarped.
There are a few lone voices willing to utter heresy. I am an avid follower of Ilusion Monetaria, a blog by ex-Bank of Spain economist Miguel Navascues. Navascues calls a spade a spade. He exhorts Spain to break free of European monetary union oppression immediately.
On the left, Catalan economist David Lizoain says the time has come for Social Democrats to ask whether the European monetary union is doing more harm than good and therefore should be dismantled. I leave you with this extract from Lizoain: "On account of the architecture of the eurozone, the countries of the European periphery cannot engage in a fiscal stimulus, a monetary stimulus, a competitive devaluation, or a financial restructuring. Trapped in the midst of recessionary downward spirals, their policy space is extremely limited. The eurozone framework has generated an economic depression and a crisis of democratic legitimacy. These are fertile conditions for even greater political failures, not for success.
"Take the Spanish case: A stimulus originating in the public sector is both prohibited, on account of existing deficit targets, and impossible, on account of financing costs on the private markets. Lending channels in the private sector are blocked, as the financial sector's balance sheet is still overwhelmed by the ever-increasing bad debts originating from the bursting of the real estate bubble. The obvious move would be to engage in a massive financial restructuring (i.e. let the bad banks fail).
"This is not possible because the ECB will not act as a lender of last resort. Banks in the periphery cannot fail without wiping out small savers. In order to guarantee deposit insurance, a bailout of the private sector (and Memorandum of Understanding) was therefore required. Last June the leaders of Europe stated: 'We affirm that it is imperative to break the vicious circle between banks and sovereigns.' Events have shown this to have been an empty promise. The cost of bailing out the banks is now being passed onto the public purse, and the drowning banks are pulling down the sovereigns with them. But if this were not bad enough, the Cyprus deal shows that not even deposit insurance for small savers can be taken for granted.
"The turn of events in Cyprus makes it far more difficult to defend the proposition that change in Europe is just around the corner, and that it will be for the better. The case for optimism does not rest on solid empirical foundations; there is little evidence of strong majorities in Germany favouring the reforms that would be needed to end the crisis and balance the eurozone.
"If the countries of the periphery were on a gold standard, they would have already been forced out of it. The euro-induced depression is a breeding ground for populism, anti-politics, extremism and bad-blood in general; it is a toxic environment for dreams of an ever closer union.
"The course of events demands a lifting of the taboo surrounding the dissolution of the eurozone. If solidarity cannot be achieved through a progressive reform of Europe's economic institutions, then perhaps it is time to consider taking them apart. Perhaps the only way to save the union is to ditch the euro."
There is hope yet.