To survive, Spain must leave the monetary union
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 36.8per 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 come 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 Rajoy government 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 (ECB) 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 GDP 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 10.6per 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 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 the 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 (EMU) 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. Dr Navascues calls a spade a spade. He exhorts Spain to break free of EMU oppression immediately.
On the Left, Catalan economist David Lizoain says the time has come for Social Democrats to ask whether EMU is doing more harm than good and therefore should be dismantled. I leave you with this extract from Mr Lizoain: "On account of the architecture of the euro zone, 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).
"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.
Frequently Asked Questions about this Article…
The article reports Spanish unemployment rose by 237,000 in the first quarter to 6.2 million people — about a 27.2% national rate, with youth unemployment far higher (57.2% nationally and up to 70% in the Canaries). For everyday investors this matters because persistent high joblessness undermines household consumption, depresses tax revenues, weighs on corporate earnings and can amplify risks in Spanish assets such as banks, sovereign bonds and property.
According to the article, public debt jumped from 69% to 84% of GDP in one year, though Jefferies economist David Owen estimates a 'real' figure nearer 113% when trade credits and unpaid bills are included. The deficit rose from 9.4% to 10.6% (7% excluding bank bailout costs), and the IMF expected it to stay around 6.9% in 2014. Higher reported and hidden debts and a large deficit can increase sovereign credit risk and affect the valuation and yield of Spanish government bonds and related investments.
The article says bond vigilantes — investors who punish countries with risky fiscal positions — have been relatively quiet because the European Central Bank (ECB) promised to backstop the Spanish debt market. In plain terms, the ECB's support can calm borrowing costs temporarily, but the article warns this may mask deterioration in the real economy rather than solve underlying fiscal and structural problems.
The article argues that joining the euro removed Spain's sovereign control over its exchange rate and monetary policy. It says the euro led to very low or even negative real interest rates earlier in the decade (around minus 2%), triggering an unsustainable boom — followed by a sharp bust. For investors, this highlights how common-currency membership can limit a country’s macro policy tools and affect long-term economic stability.
The article describes austerity cuts as causing eroding tax revenues, collapsing household consumption and falling house prices — trends that slow recovery. While public debate often focuses on EU/IMF (Troika) prescriptions, the piece suggests the structural constraints of the eurozone, not just austerity, are central. For investors, prolonged austerity tied to weak growth can mean lower corporate profits, credit stress and tougher conditions for domestic asset recovery.
The article highlights voices urging Spain to consider leaving the euro or dismantling elements of the eurozone: ex-Bank of Spain economist Miguel Navascues and Catalan economist David Lizoain argue the country is trapped by EMU rules and needs policy freedom (including things like competitive devaluation or large-scale financial restructuring). Such proposals are politically charged; any serious talk of exit or major restructuring would create market volatility and uncertainty for investors in Spanish sovereign bonds, banks and equities.
The article notes Spanish banks remain overwhelmed by bad debts from the bursting real-estate bubble and cites calls for a massive financial restructuring — in effect allowing bad banks to fail — to clear balance sheets. For investors, unresolved bank asset quality problems imply potential losses, recapitalisation needs and ongoing constraints on credit flow to the real economy.
The article documents a large Spanish diaspora (about 260,000 people aged 16–30 left last year) and warns that prolonged economic pain is fertile ground for populism, anti-politics and social unrest. These social and political shifts can translate into policy uncertainty, sudden regulatory changes or shifts in fiscal priorities — all factors that can affect sovereign risk and the long-term outlook for investments in the country.
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