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.