ECB to Spain: Drop Dead.

[lomiller]

Explain how that solution helps Spain. What will they pay for imported goods with, their worthless pesos?

If their pesos are worthless every product produced in Spain will be cheaper than products produced anyplace else making Spain the industrial powerhouse of Europe.

 

[lomiller]

That's kind of the point of currency devaluation. Domestic goods become cheaper relative to imports, so more people buy domestic goods boosting the local economy. At the same time exports become more competitive increasing exports, so foreign money comes in. Note that the pesos would not be "worthless", just "worth less".

Currency devaluation not actually the point, more like a side effect. A weaker economy inherently reflects the need for a weaker currency. Trying to deliberately weaken your currency in order to spur exports is ultimately just going to trigger inflation and asset bubbles.

 

[lupus_in_fabula]

Spain's problems have nothing to do with the Euro and everything to do with economic policy and budgeting.

From where do you get your information?

BBC:

Spain's story illustrates the fact that the eurozone's problems run far deeper than the issue of excessive borrowing by ill-disciplined governments.

Greece, Portugal and Italy all had way too much debt.

But the Spanish government's borrowing was under control - that is, it ran a balanced budget on average every year until the eve of the 2008 financial crisis.

And as Spain's economy grew rapidly before 2008, its debt-to-GDP ratio was falling. Germany's, by contrast, continued to rise.

 

[kevsta]

From where do you get your information?

BBC:

exactly. Spain has gone bust trying to bail out it's banking system, after the people (buyers, developers, speculators, foreigners etc) blew themselves up in a property bubble caused by easy money at Germanic interest rates.

Wildcat likes to lecture about government fiscal irresponsibility, when in fact Spain's government are a paragon of virtue by comparison to the US.

 

[lupus_in_fabula]

exactly. Spain has gone bust trying to bail out it's banking system, after the people (buyers, developers, speculators, foreigners etc) blew themselves up in a property bubble caused by easy money at Germanic interest rates.

Yeah well … the people (and the government) are certainly taking the hit now. It's not so much about Germanic interest rates; it's still private sector borrowing and lending within a common currency area, EMU €, which makes it difficult for a single government to do much about it. And yes, oh dear, we're looking at the basic €-problem again. Go figure?

Reuters:

German banks were facing deep losses linked to potential Spanish bank failures. However, a bailout of Spanish banks - backed initially by Spanish taxpayers and potentially later by the European Stability Mechanism - will ensure creditors won't take losses, making the bailout effectively a back-door bailout of reckless German lending.

Among European lenders, those in Germany are by far the most exposed to Greece, Ireland, Portugal, Spain and Italy, with outstanding loans worth 323 billion euros at the end of last year, according to BIS data.

Total periphery exposure equates to about 4 percent of the 7.3 trillion euros of assets held by German banks and almost an eighth of the country's annual GDP. Perhaps because of the size of the exposure, Germany has continually pushed against private sector losses - and was initially hostile to writing down Greek government debt.

Wildcat likes to lecture about government fiscal irresponsibility, when in fact Spain's government are a paragon of virtue by comparison to the US.

The "lecture" is more like bringing a rugby ball to a basketball game.

 

[WildCat]

If their pesos are worthless every product produced in Spain will be cheaper than products produced anyplace else making Spain the industrial powerhouse of Europe.

Spain isn't going to suddenly eliminate its widespread corruption and develop industrial infrastructure by dumping the Euro. They were western Europe's economic backwater (along with Portugal) prior to adopting the Euro, I see no reason for that to change if they get rid of it. And in the global economy you have to import most modern conveniences - computers, industrial machinery, energy. I don't see Spain becoming a major producer of those items. It will be just as it was before the Euro.

 

[WildCat]

From where do you get your information?

BBC:

So Spain was doing good under the Euro until the crisis hit, much better than they were doing under their own currency.

 

[kevsta]

Spain isn't going to suddenly eliminate its widespread corruption and develop industrial infrastructure by dumping the Euro. They were western Europe's economic backwater (along with Portugal) prior to adopting the Euro, I see no reason for that to change if they get rid of it. And in the global economy you have to import most modern conveniences - computers, industrial machinery, energy. I don't see Spain becoming a major producer of those items. It will be just as it was before the Euro.

Spain GDP by sector http://en.wikipedia.org/wiki/Economy_of_Spain

The economy of Spain is the 13th-largest economy in the world, the fifth-largest in the European Union, and the fourth-largest in the Eurozone, based on nominal GDP comparisons

agriculture (2.3%),
energy (2.3%),
industry (11.7%),
construction (10.0%),
services (66.6%) (December 2009)

Exports €248.9 billion ($341.6 billion) F.O.B. (2009)[1]
Export goods Machinery, motor vehicles, chemicals, shipbuilding, foodstuffs, electronic devices, pharmaceuticals and medicines, other consumer goods

USA GDP by sector http://en.wikipedia.org/wiki/Economy_of_the_United_States

agriculture: 1.2%,
industry: 19.2% [inc construction?]
services: 79.6% (2011 est.)

If Spain became cheaper than the rest of Europe once more, then tourism here would also become particularly attractive once again.

During the last four decades Spain's foreign tourist industry has grown into the second biggest in the world and was worth approximately 40 billion Euros, about 5% of GDP, in 2006.[65] The total value of foreign and domestic tourism came to nearly 11% of the country's GDP and provided employment for about 2 million people.[66] In August 2012 Spain beat its own record of monthly arrivals, having registered 7.9 million visitors.

the country actually has quite a lot going for it if it could slip the noose of the Euro and associated banker debt that needs repaying.

 

[lupus_in_fabula]

So Spain was doing good under the Euro until the crisis hit, much better than they were doing under their own currency.

Many countries were, both within and outside the Euro zone. That was due the global financial sector ballooning beyond reasonable proportions (the Euro made that considerably easier as well - freer movement of capital).

The private sector went boom and bust … and now the public sector is trapped; self-amputated.

 

[lomiller]

Spain isn't going to suddenly eliminate its widespread corruption and develop industrial infrastructure by dumping the Euro.

Evidence for widespread corruption? Besides, China has widespread corruption and it hasn’t hindered their industrial production.
Leaving the Euro would not make Spain’s currency “worthless” as you claim but if it did this is identical to saying Spain’s cost of producing goods is zero. That’s a pretty tough number for anyone else to compete against.

And in the global economy you have to import most modern conveniences - computers, industrial machinery, energy. I don't see Spain becoming a major producer of those items. It will be just as it was before the Euro.

Spain may or may not end up producing these items but the Law of Comparative Advantage tells us it doesn’t matter. Spain would produce something and trade if for items it wants to import. This is why their currency wouldn’t become worthless as you suggest, it would simply drop to the point where Spanish exports become desirable enough to pay for Spanish imports. The whole point of a floating currency is that is it rises/falls to equalize trade balance and capital flows.

 

[NWO Sentryman]

Evidence for widespread corruption? Besides, China has widespread corruption and it hasn’t hindered their industrial production.

Really? From what I've been reading, China has cut out so much corruption in the past few years that their GDP growth has stalled, and their luxury goods market has collapsed. It's not the third world hellhole that people think it is.

 

[kevsta]

Evidence for widespread corruption?

rare though it is for me to agree with wildcat, there is a good amount of corruption at local and municipal level, and probably about average for the western world at government level.

worse though, you have a decent sized black market because of bad and noncompetitive employment laws one way and another. not sure if black market is the right phrase, maybe black economy?

edit.. corruption goes right to the top lol http://www.theibizasun.com/issues/bi_noticias.asp?id=51&categ=2

It was announced last week that the son-in-law of the King of Spain will be tried for crimes of embezzlement, corruption, unfair influence and falsification over his management of the non-profit making Nóos Institute. Urdangarin, the Duke of Palma and married to the monarch’s younger daughter Cristina, is accused of siphoning millions of euros from the Institute for organizing sports and tourism conferences in the Balearic Islands. As part of the investigation into his business activities, 63 company owners and administrators were questioned by the police about invoices issued to the Institute for work which was never carried out. The additional charge of tax evasion for the non declaration of 375,000€ in a Swiss bank account has been dropped.

edit2 http://soerenkern.com/web/?p=700

yep, quite a lot..

 

[kevsta]

http://blogs.telegraph.co.uk/financ...lvent-get-your-money-out-while-you-still-can/

What's projected to occur is essentially what happens in all bankruptcies. Eventually you have to borrow more just to pay the interest on your existing debt. The fiscal compact requires eurozone countries to reduce their deficits to 3 per cent by the end of this year, though Spain among others was recently granted an extension. But on these numbers, there is no chance ever of achieving this target without further austerity measures, which even if they were attempted would very likely be self defeating. IN any case, it seems doubtful an economy where unemployment is already above 25 per cent could take any more.

In the past, the IMF has been guilty of being far too optimistic about Spain, both on the outlook for growth and the public finances, so it's possible it is now committing the reverse mistake of undue pessimism. Yet somehow I doubt it. Spain is chasing its tail down into deflationary oblivion.

All this leads to the conclusion that a big Spanish debt restructuring is inevitable. Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank's "outright monetary transactions" programme. The ECB has promised to print money without limit to counter the speculators. But in the end, no amount of liquidity can cover up for an underlying problem with solvency.

Europe said that Greece was the first and last such restructuring, but then there was Cyprus. Spain is holding off further recapitalisation of its banks in anticipation of the arrival of Europe's banking union, which it hopes will do the job instead. But if the Cypriot precedent is anything to go by, a heavy price will be demanded by way of recompense. Bank creditors will be widely bailed in. Confiscation of deposits looks all too possible.

I don't advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it's the only rational thing to do.

 

[kevsta]

worse though, you have a decent sized black market because of bad and noncompetitive employment laws one way and another. not sure if black market is the right phrase, maybe black economy?

good article, has it exactly right.

Black Market Or Bust: The Stark Choice Facing Many Of Spain’s Self-Employed

Every day scores of self-employed workers in Spain fall off the economic radar. In February of this year, three self-employment associations — ATA, UPTA and Uatae — sounded the alarm, warning that the number of self-employed and freelance workers paying social security contributions had fallen below three million for the first time since March 2006.

More worrisome still, 2013 promises to be a far worse year than 2012, given that the first two months of this year alone saw half as many self-employed drop off the social security register as in the whole of 2012.

Not that the government seems to care. Indeed, in the cruelest of ironies, the worst culprit when it comes to late payment of invoices — one of the main forces pushing the self-employed and small and medium-size enterprises (SMEs) over the brink of the financial abyss – is the country’s local and regional government institutions

in fact I just moved my business to UK registered and save over 500 Euros per month net paying UK rates rather than Spanish rates for the same income.

 

[jj]

Communism and totalitarianism have wreaked ecological havoc far beyond anything in democratic, capitalist countries.

So far. Of course, when capitalism falls into a totalitarian state via skewed wealth distribution, where do we go from there?

The whole Spanish thing is hard to solve now, given that the idiocy of austerity economics already destroyed the economy. I don't think the Euro has any real shot at undoing what it did to Spain and Greece. Now, neither Spain nor Greece is without guilt here, of course, but the whole austerity nonsense turned a mess into a disaster of still-growing proportions.

And it's all based on bad arithmetic and reversal of cause and effect. Sad. Very sad.