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Is Spain set to follow Greece?

Is Spain set to follow the same terrible road as Greece, as Rajoy obeys German diktats?


Even without fully grasping the situation in Greece right now, it’s difficult to read the list of austerity measures being imposed on it without feeling shocked. Public workers like teachers must return wages, because the debt deal is backdated to November. The government must cut €300m from public pensions, leaving people in and approaching retirement destitute. Greece must auction its €110 billion gold reserves in the event it fails to meet targets, removing the absolute last means of funding itself when all others are exhausted.

For its pains, in all likelihood Greece will be forced to return to Brussels in 12 months to request more funds, because these same demands are pushing it closer to collapse. I don’t think it’s exaggerating to say Greece has been pillaged and left for dead in order to stabilise a currency that brings Germany cheaper exports. (In fact it’s astonishing that the euro is gaining given these events. Do investors not realise the euro zone has cannibalised one of its members to stay alive?) Of course, the question facing other indebted nations like Spain therefore is: will they allow themselves to be subjected to the same process?

Judging from statements from Prime Minister Mariano Rajoy this week, the answer is: more or less. There’s no doubt Rajoy has already agreed in principle to the Berlin-Brussels austerity diktats. The sticking point is how quickly EU officials demand that Madrid make the cuts, and whether this suffocates Spain so completely it enters the same cycle as Greece. For instance, right now Madrid is requesting leniency from Brussels regarding its pledge to cut the deficit 4.0% in 2012 to just –4.4%.

To date, the cuts already imposed have left Valencia in particular crippled. There are reports of schools unable to afford toilet paper, and town halls being shut down because they can’t pay electricity bills. Not to mention the brutal police treatment regarding recent student protests to the cuts. Therefore, to cut faster would exacerbate this problem, forcing Spain into a vicious circle in which it must cut deeper and deeper to outpace its own losses in revenue.

For its own part, Brussels appears amenable to these complaints (which is some small mercy.) It confirmed this morning that Spain will enter recession in 2012, contracting -1.0%, in part because of the austerity diktats being imposed on it. (This compares to estimates just three months ago that Spain would expand +0.7% this year.) Given that Brussels is not (I think) intent on leaving all of Europe destitute, it is hence possible officials might grant Madrid a reprieve. This provides hope.

For my part though, I can’t understand why Spanish leaders including Rajoy pay Brussels heed in the first place. Why should Madrid obey the commands of an institution so incompetent, it revises GDP estimates down –1.7% in three months? If I were the prime minister of Spain, I’d look at what’s happened to Greece, look at what I was being asked to do to my own country, and think about whether I wanted to listen.

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Peter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.

Copyright: Peter Lavelle, Pure FX
Category: Expats, Spain News
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