Saturday, March 31, 2012
Just an update to yesterday's post
For the last two days I've been commenting on the state of the Spanish economy. And then out of the blue, as if to confirm what I had been saying all along, I found this article on the BBC website which explains in greater depth the Spanish financial crisis. However, the conclusion is the same: Right now, the Spanish are Europe's spain in the ass.
Friday, March 30, 2012
Spain's General Strike: gearing up for round two
Labor unions stage massive protests across Spain leaving the government groggy but not out. Unfortunately, this is only round one.
It was like watching a game score instant replay only five months later. Yesterday's general strike was highly reminiscent of Athens last October and the unions are promising more of the same unless the government of Mariano Rajoy backs down on its labor reforms.
Facing massive debt, unprecedented levels of unemployment and a stagnant economy, Rajoy's measures include the reduction of worker compensation, company incentives for new hires, higher taxes and lower government spending, all in an attempt to reverse the country's economic fortunes of late.
Sounds like a solid plan, right? So how come my gut tells me it's all marron glacé? You know, as in sugar coated pellets of doo-doo? I understand the reduction in worker comp. I understand the company incentives for new hires. And I understand lower government spending. But higher taxes???
The administration needs to increase revenue to cover pensions, health care and unemployment benefits, I get that. But raising taxes is a double edged sword, one that will have serious consequences. It is not feasibly possible or proper to raise taxes on a populace that is already reeling from the devastating effects of the unconscionable decisions taken by the previous administration.
I don't have the exact figures but there's approximately one million households that have zero income; every eligible member is unemployed and their benefits have run out. That's translates to about 4 million people with no means of livelihood. Other families are surviving under heavy strain because only one member has a job. So, if we now increase basic staples such as food, shelter and energy, where does that leave these people?
I'm not an economist nor do I claim to understand all the nuances of fiscal policy. But through sheer common sense, I can tell you this: you raise taxes and you are not going to induce increased private spending and investment which is what leads to higher productivity and employment. On the contrary, it has the opposite effect. It's time tested and proven. If you want to increase investment, employment, production and turnover, reduce taxes and reduce public spending.
The only thing this government has achieved thus far is to provide cannon fodder for the leftist unions. And more rhetorical bombs are going to fly before the situation gets better. Get ready for round two.
It was like watching a game score instant replay only five months later. Yesterday's general strike was highly reminiscent of Athens last October and the unions are promising more of the same unless the government of Mariano Rajoy backs down on its labor reforms.
Facing massive debt, unprecedented levels of unemployment and a stagnant economy, Rajoy's measures include the reduction of worker compensation, company incentives for new hires, higher taxes and lower government spending, all in an attempt to reverse the country's economic fortunes of late.
Sounds like a solid plan, right? So how come my gut tells me it's all marron glacé? You know, as in sugar coated pellets of doo-doo? I understand the reduction in worker comp. I understand the company incentives for new hires. And I understand lower government spending. But higher taxes???
The administration needs to increase revenue to cover pensions, health care and unemployment benefits, I get that. But raising taxes is a double edged sword, one that will have serious consequences. It is not feasibly possible or proper to raise taxes on a populace that is already reeling from the devastating effects of the unconscionable decisions taken by the previous administration.
I don't have the exact figures but there's approximately one million households that have zero income; every eligible member is unemployed and their benefits have run out. That's translates to about 4 million people with no means of livelihood. Other families are surviving under heavy strain because only one member has a job. So, if we now increase basic staples such as food, shelter and energy, where does that leave these people?
I'm not an economist nor do I claim to understand all the nuances of fiscal policy. But through sheer common sense, I can tell you this: you raise taxes and you are not going to induce increased private spending and investment which is what leads to higher productivity and employment. On the contrary, it has the opposite effect. It's time tested and proven. If you want to increase investment, employment, production and turnover, reduce taxes and reduce public spending.
The only thing this government has achieved thus far is to provide cannon fodder for the leftist unions. And more rhetorical bombs are going to fly before the situation gets better. Get ready for round two.
Tuesday, March 27, 2012
Europe’s Spain in the ass
Europe’s brightest financial planners are at loggerheads with the Greeks over their bailout package but Spain is the tumor in Europe’s behind waiting to metastasize.
We all know the situation; we’ve read the stories. France and Germany, designers of a unified monetary system in Europe are seeing their plans begin to unravel thanks to the economic conditions of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Spain is a microcosm of Europe. It is divided and socially fractured. Unlike the former republic of Yugoslavia, which was a coalition of independent states created after World War I, Spain has been Spain since Ferdinand and Isabella married in 1469 with its heyday occurring during the reigns of Charles V and Philip II. Spain’s decline began with Napoleon’s conquest of Europe and reached its nadir with Franco’s dictatorship. Since then, the Spanish have been trying to find themselves.
Spain is one of the old continent's original colonizers, the others being Britain, Portugal, France, the Low Countries and, to some extent, Italy. However, with the exception of Portugal, Spain has never achieved the prosperity of the other members of this illustrious club. The Spanish will tell you this is due to the 40 years of Franco dictatorship. While true to a certain extent, the answer is oversimplified.
A large part of Spain’s problem, as mentioned earlier, is its lack of unity. There is a general mistrust among the different autonomous regions of Spain. Unlike other nationalities that put country above personal interests, Spain has no such sense of patriotism. In fact, Spain is the only country I’m aware of where people are accused of being fascists for displaying the flag. This means that there is little or no consensus among political parties when it comes to implementing sound fiscal policy because individual interests outweigh collective ones.
The current economic climate is the perfect example. Spain got caught up in the subprime debacle because its economy had evolved from an agro-industrial base to an economy based on real estate speculation. There was land to develop, money to be made and everybody could get in on the act.
The socialists took over from the centrist right government in 2004 inheriting a healthy economy. By 2008, the chinks in the armor started to show. Throughout his second administration, president Zapatero refused to carry out any substantial financial reforms which led to a loss of confidence and an early call to elections in 2011.
Now the centrist right party is back in power and the hard decisions have to be made. Their first call to order was to comply with EU directives to keep the budget deficit in check and to reform the financial system to reduce unemployment rates. The measures include reducing workers severance packages, modifying the universal health care system, a reduction in civil servants’ compensation, eliminating redundant or inoperative ministries, greater freedom for small business owners to negotiate labor contracts and a slew of other initiatives - basically, everything the socialists should have done but never did.
So now the socialists are screaming “Foul!” and promising a whole series of actions including a general strike and civil disobedience. Sounds like Greece, right? Yes, except for one major difference. Spain’s GDP for 2011 is approximately four times that of Greece, five times that of Portugal and six times that of Ireland. It is twice the combined GDP of Greece, Potugal and Ireland. And unlike Italy which has a large industrial base and is therefore able to manufacture goods and recover its economy, Spain’s economy is based on services.
Hence, while a Grecian debt default may be bad for France and Germany’s image, Europe has the capacity to survive it. The same cannot be said for a Spanish default which could cause the Euro to fail entirely.
What it boils down to is that expenses are going up and wages are going down. Whether this will spur employment remains to be seen. So far, unemployment rates remain the same but are forecast to rise and that means spending will continue to decline. It’s going to get worse before it gets better. How much worse is anybody’s guess. But if it does get worse, the Athens riots will only be a prelude to what’s coming.
We all know the situation; we’ve read the stories. France and Germany, designers of a unified monetary system in Europe are seeing their plans begin to unravel thanks to the economic conditions of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Spain is a microcosm of Europe. It is divided and socially fractured. Unlike the former republic of Yugoslavia, which was a coalition of independent states created after World War I, Spain has been Spain since Ferdinand and Isabella married in 1469 with its heyday occurring during the reigns of Charles V and Philip II. Spain’s decline began with Napoleon’s conquest of Europe and reached its nadir with Franco’s dictatorship. Since then, the Spanish have been trying to find themselves.
Spain is one of the old continent's original colonizers, the others being Britain, Portugal, France, the Low Countries and, to some extent, Italy. However, with the exception of Portugal, Spain has never achieved the prosperity of the other members of this illustrious club. The Spanish will tell you this is due to the 40 years of Franco dictatorship. While true to a certain extent, the answer is oversimplified.
A large part of Spain’s problem, as mentioned earlier, is its lack of unity. There is a general mistrust among the different autonomous regions of Spain. Unlike other nationalities that put country above personal interests, Spain has no such sense of patriotism. In fact, Spain is the only country I’m aware of where people are accused of being fascists for displaying the flag. This means that there is little or no consensus among political parties when it comes to implementing sound fiscal policy because individual interests outweigh collective ones.
The current economic climate is the perfect example. Spain got caught up in the subprime debacle because its economy had evolved from an agro-industrial base to an economy based on real estate speculation. There was land to develop, money to be made and everybody could get in on the act.
The socialists took over from the centrist right government in 2004 inheriting a healthy economy. By 2008, the chinks in the armor started to show. Throughout his second administration, president Zapatero refused to carry out any substantial financial reforms which led to a loss of confidence and an early call to elections in 2011.
Now the centrist right party is back in power and the hard decisions have to be made. Their first call to order was to comply with EU directives to keep the budget deficit in check and to reform the financial system to reduce unemployment rates. The measures include reducing workers severance packages, modifying the universal health care system, a reduction in civil servants’ compensation, eliminating redundant or inoperative ministries, greater freedom for small business owners to negotiate labor contracts and a slew of other initiatives - basically, everything the socialists should have done but never did.
So now the socialists are screaming “Foul!” and promising a whole series of actions including a general strike and civil disobedience. Sounds like Greece, right? Yes, except for one major difference. Spain’s GDP for 2011 is approximately four times that of Greece, five times that of Portugal and six times that of Ireland. It is twice the combined GDP of Greece, Potugal and Ireland. And unlike Italy which has a large industrial base and is therefore able to manufacture goods and recover its economy, Spain’s economy is based on services.
Hence, while a Grecian debt default may be bad for France and Germany’s image, Europe has the capacity to survive it. The same cannot be said for a Spanish default which could cause the Euro to fail entirely.
What it boils down to is that expenses are going up and wages are going down. Whether this will spur employment remains to be seen. So far, unemployment rates remain the same but are forecast to rise and that means spending will continue to decline. It’s going to get worse before it gets better. How much worse is anybody’s guess. But if it does get worse, the Athens riots will only be a prelude to what’s coming.
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