With 100Bn euros in fresh aid, Spain seeks to stabilize their over exposed banking system. The question is, is this too little, too late?
Spanish bankers must be passing around cigars, popping champagne corks and making appointments with their favorite massage therapists after receiving the news that the ECB was coming to rescue their industry.
If anyone thinks this bailout will change everything in Spain, and by extension Europe, let me be firm and unequivocal. Yes, it will change things...but not for the better. I've already mentioned in previous posts that Spain is a cancer just waiting to metastasize.
While this bailout may appear to work in the short term, true success can only be measured in the medium and long term. And that long term success is dubious at best.
Spain, like the rest of Europe, is highly socialized, which basically means that government is used to spending money it does not have. To top it off, socialism has no regard for free enterprise. Let me put it this way. If you're an entrepreneur, you want to be living under a government system that embraces free enterprise, i.e. a capitalist system. If, on the other hand, you are a worker, then you want to live in a socialist environment.
The problem with socialism, as opposed to capitalism, is that its adherents believe that the way to pull a country out of the doldrums is through increased public spending. In order to cover increased public debt, socialists simply raise taxes. The result of all this government intervention is minimal growth rates. Compare annual growth rates of socialist countries and you'll see that these are usually in the order of 1.8 to 2 percent a year on average. Socialist governments are structured for this kind of growth. And it works as long as economies are sustainable because everything is controlled, from inflation to pay raises and the cost of living or CPI (consumer price index).
However, the opposite is also true. When the economy takes a downturn, socialist systems are the least prepared to handle it precisely because of the kind of structure they have in place. I'll give you an example.
In 2008, when Spain first started to feel the effects of the recession and unemployment started to reach unprecedented levels, instead of providing incentives to increase consumer spending such as lowering taxes and implementing mechanisms to promote entrepreneurship, the government decided to hire more civil servants. In my previous post I stated how Spain had the highest number of civil servants per capita compared to other European nations. Zapatero's answer to the crisis: increase public debt; hire more civil servants to offset increasing unemployment figures. Where were the incentives to promote new businesses and new hires? Nowhere.
And that's where Spain finds itself today. The 100Bn euro bailout package is destined to recapitalize the over extended banking system. None of this money will be used to reduce unemployment which stands at over 25 percent (and increasing) or to promote new businesses. Instead, to finance interest payments and decrease the deficit, the government will now raise VAT to 21 percent from the current 18. This is the second VAT increase in three years.
It's not rocket science. If you have an unemployment rate of 25%, with mom and pop stores closing at an alarming rate (95% of all businesses in Spain are SMBs) because of reduced consumer spending, raising taxes will just kill the economy completely. And in the process, it will bring down the rest of Europe. The ten year yield on government bonds is the highest its ever been. Moody's and S&P have already downgraded Spain's credit worthiness to near junk status. All this means only one thing: there is absolutely no confidence in the current administration.
Spain is a ship of fools run by incompetents, and like the Titanic, is heading straight towards an iceberg.
Thursday, June 14, 2012
Friday, June 8, 2012
I read the news today, oh boy...
Talk about having a bad day.
The confluence of the stars must have been propitious. Today was one of the worst news days in recent memory. Let me give you a sampling:
- Spain 'to request bank aid tomorrow' - The Independent
- Ruud Gullit: 'There were monkey chants at Dutch Euro 2012 training' - The Telegraph
- Mick Fleetwood: Bob Welch's Suicide Was 'Out of Character' - Rolling Stone
- What the password leaks mean to you (FAQ) - CNet
- Princes William and Harry join Euro 2012 boycott over Ukraine's treatment of jailed opposition leader Yulia Tymoshenko - Daily Mail Online
- Police investigate possible link between gay porn star 'cannibal killer' Luka Rocco Magnotta and body parts under Hollywood sign - The Independent
- Bus bombing kills at least 18 in northwestern Pakistan - Washington Post
And of course, there's Syria. The headlines coming out of Syria are just too numerous to list here but the Telegraph updates its page every couple of minutes.
It seems we have it all today, from racism and boycotts in sports to a snuff film murderer, terrorist bombings, failed economies and wholesale massacres. Someone is having a heyday out there.
And while all these headlines are serious, the Syrian conflict is limited and confined to the region...for now. The Spanish bailout, on the other hand, poses the greatest peace time threat because it is affecting millions of lives and has the potential to affect many more. It's effects will be felt world-wide and could have long lasting consequences. I previously mentioned that Europe cannot afford to stand idly by while Spain's finances vaporize into radioactive dust; the fallout would be brutal.
The question is, if you're Germany, what do you do? Do you agree to a bailout package and hope the 4th largest European economy recovers? What happens if they don't? Much of Spain's financial problems are structural. In other words, when times were good, there was very little fiscal responsibility; money flowed in and civil service employment rose to an all time high in order to sugar coat unemployment figures. The problem? Once you become a civil servant, you have a job for life. You cannot get fired under any circumstance for any reason. The result? Spain has more civil servants per capita than any other nation in Europe. So when the country faces a budget deficit and is forced to fiscalize, public spending cutbacks are hard to come by. To make matters worse, Spain has one of the most unproductive work forces in the eurozone (see my previous posts for sources).
Conversely, do you make an example of Spain, deny the additional funds, tell Rajoy they have to go it alone regardless of the consequences and hope the lesson is digested and assimilated by Italy, Greece, Portugal and Ireland?
Either way, Germany is caught between a rock and hard place.
If they do provide the 60 billion euro package Spain is requesting, it will tie up much needed funds at a time when Spain's financial rating is the lowest it's ever been. Additionally, the German people, understandably, are beginning to get fed up with having to bail out all these Mediterranean nations and that may cost Merkel at the ballots. If they don't come to the rescue, Germany loses credibility, prestige and leadership. That plus the whole euro ball of wax may just unravel and plunge financial markets back to the dark ages.
The confluence of the stars must have been propitious. Today was one of the worst news days in recent memory. Let me give you a sampling:
- Spain 'to request bank aid tomorrow' - The Independent
- Ruud Gullit: 'There were monkey chants at Dutch Euro 2012 training' - The Telegraph
- Mick Fleetwood: Bob Welch's Suicide Was 'Out of Character' - Rolling Stone
- What the password leaks mean to you (FAQ) - CNet
- Princes William and Harry join Euro 2012 boycott over Ukraine's treatment of jailed opposition leader Yulia Tymoshenko - Daily Mail Online
- Police investigate possible link between gay porn star 'cannibal killer' Luka Rocco Magnotta and body parts under Hollywood sign - The Independent
- Bus bombing kills at least 18 in northwestern Pakistan - Washington Post
And of course, there's Syria. The headlines coming out of Syria are just too numerous to list here but the Telegraph updates its page every couple of minutes.
It seems we have it all today, from racism and boycotts in sports to a snuff film murderer, terrorist bombings, failed economies and wholesale massacres. Someone is having a heyday out there.
And while all these headlines are serious, the Syrian conflict is limited and confined to the region...for now. The Spanish bailout, on the other hand, poses the greatest peace time threat because it is affecting millions of lives and has the potential to affect many more. It's effects will be felt world-wide and could have long lasting consequences. I previously mentioned that Europe cannot afford to stand idly by while Spain's finances vaporize into radioactive dust; the fallout would be brutal.
The question is, if you're Germany, what do you do? Do you agree to a bailout package and hope the 4th largest European economy recovers? What happens if they don't? Much of Spain's financial problems are structural. In other words, when times were good, there was very little fiscal responsibility; money flowed in and civil service employment rose to an all time high in order to sugar coat unemployment figures. The problem? Once you become a civil servant, you have a job for life. You cannot get fired under any circumstance for any reason. The result? Spain has more civil servants per capita than any other nation in Europe. So when the country faces a budget deficit and is forced to fiscalize, public spending cutbacks are hard to come by. To make matters worse, Spain has one of the most unproductive work forces in the eurozone (see my previous posts for sources).
Conversely, do you make an example of Spain, deny the additional funds, tell Rajoy they have to go it alone regardless of the consequences and hope the lesson is digested and assimilated by Italy, Greece, Portugal and Ireland?
Either way, Germany is caught between a rock and hard place.
If they do provide the 60 billion euro package Spain is requesting, it will tie up much needed funds at a time when Spain's financial rating is the lowest it's ever been. Additionally, the German people, understandably, are beginning to get fed up with having to bail out all these Mediterranean nations and that may cost Merkel at the ballots. If they don't come to the rescue, Germany loses credibility, prestige and leadership. That plus the whole euro ball of wax may just unravel and plunge financial markets back to the dark ages.
Friday, June 1, 2012
Early 20th century Europe - Part II
The reign in Spain...
As mentioned in my previous post, by the time the great war started every major country in Europe was directly involved or had a stake in its outcome. However, one country was conspicuous by its absence. Spain, licking its wounds from a century of turmoil, was politically, economically and socially spent and had remained neutral throughout the continental conflict.
The decline of the Spanish empire started back in the 18th century with the War of Succession (1701-1714) and culminated in the 19th century with the War of Independence or Peninsular War (1808-1814), the Civil War of 1820-1823, three Carlist Wars (1833-1839; 1846-1849; 1872-1876) and the Spanish American War of 1898.
The first and last of these wars were unavoidable. The Civil War of 1820 and the three succeeding Carlist Wars were the long term consequences of the War of Independence of 1808 which was sparked by Napoleon's usurpation of the crown. It was a war born out of greed and double crosses.
The War of Succession 1701-1714
When Charles II died in 1700 he had no heirs, and with his passing, the Habsburg line in Spain which had ruled for two centuries, came to an abrupt end. The War of Succession that followed was one in which Europe's ruling families, all related either by blood, marriage or both, opposed the naming of Philip, Duc d'Anjou, grandson of Louis XIV the Sun King and grand nephew of Charles II, as heir to the Spanish throne as this would have created a world super power with the consolidation of vast territories under one ruler and would have upset the balance of power in Europe. These territories included the Netherlands (through the Habsburg line), the kingdoms of Milan, Naples and Sicily as well as colonies in the Americas (Louisiana, Canada and South America) and Asia (Philippines).
Hence, alliances were formed. Opposing the French-Spanish coalition were England, Portugal, the Dutch Republic, the Duchy of Savoy and the Holy Roman Empire (Germany). It was during this war that England took control of Gibraltar from Spain.
Ultimately, Philip was recognized as king in the Treaty of Utrecht but had to renounce any claim to the French throne and ceded Spain's European possessions to Austria and England. It was the start of the Spanish Bourbon line from which the current king, Juan Carlos I, is descended. The decline had begun.
The War of Independence 1808-1814
If you're familiar with Spanish painter, Goya, then you have no doubt seen his paintings, Dos de Mayo and Los Fusilamientos del Tres de Mayo which represent the Spanish uprising against Napoleonic troops and the subsequent executions of the rebels by the French.
However, this is a war that might have been avoided. Napoleon, taking advantage of the favorable allied relations that existed between France and Spain, (the queen consort of Charles IV, Maria Luisa de Parma, was the daughter of Louis XV) gained permission to transit through Spanish territory (via the Treaty of Fontainebleau 1807) on his way to invading Portugal which had defied France by aligning with the British. Napoleon had called for a continental blockade of British imports after the defeat of the combined French and Spanish naval fleets at the hands of Lord Admiral Nelson at Trafalgar in 1805 and was eager for vengeance, and thus, set out to gain control of Portuguese ports.
As fate would have it, the treaty turned out to be a double double-cross. Spanish Prime Minister, Manuel de Godoy, initially requested a Portuguese alliance against invading French troops but had secretly made a deal with the French to divvy up Portuguese territories after the latter's defeat. France, in turn, had no intention of sharing anything with Spain, usurped the Spanish crown, forced the abdication of Charles IV and installed Joseph Bonaparte as king. As a result, Spain turned against Napoleon, allied itself with the British and a protracted war ensued.
So much for alliances. Spain's greed and subterfuge was its own undoing.
The Civil War of 1820-1823
After Napoleon's defeat in 1814, Ferdinand VII, son of deposed king Charles IV, was restored to the monarchy. During that time a liberal constitution (1812) was drafted and approved by the Cadiz Cortes (National Assembly). It espoused the liberal ideals of the French Revolution of 1789 including the creation of a constitutional monarchy with limited power. In order that he might return to assume the Spanish throne, Ferdinand VII, who was exiled in France during Joseph Bonaparte's rule, agreed to the liberal provisions of the 1812 Constitution, albeit begrudgingly.
Given the years of internal conflict, mistrust, secret deals and betrayals, the liberals and conservatives were soon going at it in sporadic conflicts that only served to erode the economy. The French stepped in and restored some semblance of order with the return of absolute rule in 1823.
The Carlist Wars
After Ferdinand VII died in 1833, his wife, Maria Cristina of Bourbon-Two Sicilies, became regent for her daughter Isabel. Before his death, Ferdinand signed the Pragmatic Sanction which allowed the throne to pass onto female heirs in contravention of Salic Law. Carlos, the brother of Ferdinand, disputed the legitimacy of the Sanction and declared himself rightful heir. A half century of civil wars soon followed by forces supporting the conservative Carlos (Carlists) against the progresistas supporting Isabel.
Isabel was finally deposed, exiled to Paris in 1868 and abdicated in 1870 resulting in the short lived First Spanish Republic.
The Spanish American War
Throughout the century, while different wars were ravaging Spain and a series of ineffectual rulers came and went, the colonies in South America started declaring their independence. Hence, not only were the wars depleting Spanish coffers, Spain could no longer count on income coming from the colonies. Everything was unraveling both at home and abroad.
The culmination of Spanish decline came at the hands of the Americans when they wrested control of Cuba and the Philippines in 1898 after the sinking of the Maine. By the turn of the century, Spain was the sick man of Europe trying to recover from a century that had left it all but broken.
Young king Alfonso XIII sat on the throne and would remain sovereign until his abdication in 1931.
Epilogue
While this summary is historically correct, it is far too brief and simplistic. Suffice it to say that Spain lived through a century of conflicting governments and ideals among numerous factions - liberals, conservatives, federalists, carlists, monarchists, republicans, anarchists, secessionists - which left the country in ruins.
This was Spain at the end of the first World War, a country in social decay in search of itself at the margin of mainstream Europe.
As mentioned in my previous post, by the time the great war started every major country in Europe was directly involved or had a stake in its outcome. However, one country was conspicuous by its absence. Spain, licking its wounds from a century of turmoil, was politically, economically and socially spent and had remained neutral throughout the continental conflict.
The decline of the Spanish empire started back in the 18th century with the War of Succession (1701-1714) and culminated in the 19th century with the War of Independence or Peninsular War (1808-1814), the Civil War of 1820-1823, three Carlist Wars (1833-1839; 1846-1849; 1872-1876) and the Spanish American War of 1898.
The first and last of these wars were unavoidable. The Civil War of 1820 and the three succeeding Carlist Wars were the long term consequences of the War of Independence of 1808 which was sparked by Napoleon's usurpation of the crown. It was a war born out of greed and double crosses.
The War of Succession 1701-1714
When Charles II died in 1700 he had no heirs, and with his passing, the Habsburg line in Spain which had ruled for two centuries, came to an abrupt end. The War of Succession that followed was one in which Europe's ruling families, all related either by blood, marriage or both, opposed the naming of Philip, Duc d'Anjou, grandson of Louis XIV the Sun King and grand nephew of Charles II, as heir to the Spanish throne as this would have created a world super power with the consolidation of vast territories under one ruler and would have upset the balance of power in Europe. These territories included the Netherlands (through the Habsburg line), the kingdoms of Milan, Naples and Sicily as well as colonies in the Americas (Louisiana, Canada and South America) and Asia (Philippines).
Hence, alliances were formed. Opposing the French-Spanish coalition were England, Portugal, the Dutch Republic, the Duchy of Savoy and the Holy Roman Empire (Germany). It was during this war that England took control of Gibraltar from Spain.
Ultimately, Philip was recognized as king in the Treaty of Utrecht but had to renounce any claim to the French throne and ceded Spain's European possessions to Austria and England. It was the start of the Spanish Bourbon line from which the current king, Juan Carlos I, is descended. The decline had begun.
The War of Independence 1808-1814
If you're familiar with Spanish painter, Goya, then you have no doubt seen his paintings, Dos de Mayo and Los Fusilamientos del Tres de Mayo which represent the Spanish uprising against Napoleonic troops and the subsequent executions of the rebels by the French.
However, this is a war that might have been avoided. Napoleon, taking advantage of the favorable allied relations that existed between France and Spain, (the queen consort of Charles IV, Maria Luisa de Parma, was the daughter of Louis XV) gained permission to transit through Spanish territory (via the Treaty of Fontainebleau 1807) on his way to invading Portugal which had defied France by aligning with the British. Napoleon had called for a continental blockade of British imports after the defeat of the combined French and Spanish naval fleets at the hands of Lord Admiral Nelson at Trafalgar in 1805 and was eager for vengeance, and thus, set out to gain control of Portuguese ports.
As fate would have it, the treaty turned out to be a double double-cross. Spanish Prime Minister, Manuel de Godoy, initially requested a Portuguese alliance against invading French troops but had secretly made a deal with the French to divvy up Portuguese territories after the latter's defeat. France, in turn, had no intention of sharing anything with Spain, usurped the Spanish crown, forced the abdication of Charles IV and installed Joseph Bonaparte as king. As a result, Spain turned against Napoleon, allied itself with the British and a protracted war ensued.
So much for alliances. Spain's greed and subterfuge was its own undoing.
The Civil War of 1820-1823
After Napoleon's defeat in 1814, Ferdinand VII, son of deposed king Charles IV, was restored to the monarchy. During that time a liberal constitution (1812) was drafted and approved by the Cadiz Cortes (National Assembly). It espoused the liberal ideals of the French Revolution of 1789 including the creation of a constitutional monarchy with limited power. In order that he might return to assume the Spanish throne, Ferdinand VII, who was exiled in France during Joseph Bonaparte's rule, agreed to the liberal provisions of the 1812 Constitution, albeit begrudgingly.
Given the years of internal conflict, mistrust, secret deals and betrayals, the liberals and conservatives were soon going at it in sporadic conflicts that only served to erode the economy. The French stepped in and restored some semblance of order with the return of absolute rule in 1823.
The Carlist Wars
After Ferdinand VII died in 1833, his wife, Maria Cristina of Bourbon-Two Sicilies, became regent for her daughter Isabel. Before his death, Ferdinand signed the Pragmatic Sanction which allowed the throne to pass onto female heirs in contravention of Salic Law. Carlos, the brother of Ferdinand, disputed the legitimacy of the Sanction and declared himself rightful heir. A half century of civil wars soon followed by forces supporting the conservative Carlos (Carlists) against the progresistas supporting Isabel.
Isabel was finally deposed, exiled to Paris in 1868 and abdicated in 1870 resulting in the short lived First Spanish Republic.
The Spanish American War
Throughout the century, while different wars were ravaging Spain and a series of ineffectual rulers came and went, the colonies in South America started declaring their independence. Hence, not only were the wars depleting Spanish coffers, Spain could no longer count on income coming from the colonies. Everything was unraveling both at home and abroad.
The culmination of Spanish decline came at the hands of the Americans when they wrested control of Cuba and the Philippines in 1898 after the sinking of the Maine. By the turn of the century, Spain was the sick man of Europe trying to recover from a century that had left it all but broken.
Young king Alfonso XIII sat on the throne and would remain sovereign until his abdication in 1931.
Epilogue
While this summary is historically correct, it is far too brief and simplistic. Suffice it to say that Spain lived through a century of conflicting governments and ideals among numerous factions - liberals, conservatives, federalists, carlists, monarchists, republicans, anarchists, secessionists - which left the country in ruins.
This was Spain at the end of the first World War, a country in social decay in search of itself at the margin of mainstream Europe.
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