The origin of the barrio

Contrary to popular belief European towns and cities were not built around churches.

It's long been said that rural growth in the middle ages centered around the edification of temples of worship. It was during this period that Christianity spread across the face of the old world and established a lasting beachhead. So naturally, rural growth was in part attributed to this fact. However, recent studies suggest this is not true. In fact, early rural growth was due not to the Church at all but to the invention of the roadside motel. Travel in those days was perilous and exhausting, so it was necessary to make several stops when traveling between say Madrid and Toledo. It could take up to four days by carriage to cover this distance of 150 kilometers. And so it seems, inns were the centerpiece of the modern mobile society. Alcohol, not religion, was the economic driver of the time. And so it was with Spain. Have you ever wondered why the smallest community unit in Spain is called a "barrio?" It's because these communities were built around bars, not churches. In fact, a recent study by Coca-Cola has found that Spain has one bar or alcohol serving establishment for every 132 residents. That's nearly 350,000 bars, cafeterias, restaurants in Spain. I don't have the exact number of churches, but I'm certain it's nowhere near this amount.

I'm willing to bet your history teacher never told you this.

The present history of Spain in 90 minutes

The crowd anticipated a comeback from a miserable 4-1 defeat in Dortmund last week. It was so palpable you could almost taste it. "We can do it!" screamed the fans. "We will do it!" screamed the players. But no one comes back  from a 4-1 deficit in the blink of an eye or without a lot of personal sacrifice.

Is this beginning to sound politically familiar yet? It dawned on me that the parallels between football and politics are inescapable.

"We have 90 minutes left," said a few players, "and that's a lot of time."

Zapatero must have thought the same thing when Paul Krugman, recipient of the 2008 Nobel Prize for Economics, told him that Spain's economy was headed down a slippery slope. "Krugman doesn't know anything about Spain. We are in the Champions League of world economies," averred Zapatero. Of course, this was back in 2007, and back then, Spain had come off very good years and posted a budget surplus - on paper. But the chinks in the armor were starting to show. Zapatero thought he could ride out the crisis with the money that he had on account.  

"We have a surplus of talent on our squad. We'll be able to ride this out to victory," affirmed club officials.

Then, as now, people wanted to believe. They put their trust on their public officials and wanted desperately to believe the crisis was a wave they would be able to ride back in to shore.

The match started well with Madrid on the attack and squandering three clear chances in less than 10 minutes.

I say squander because that's exactly what it was, much like the way the government squandered away the opportunity to correct the situation when it still had the chance, initiating public works of no intrinsic value simply to say that they were creating employment. 

The crowd was going wild, hoping against hope their team might pull off the miracle.

It was the same kind of hope people displayed when Zapatero decided to call elections in November of 2011. Tired of the government's lies and mismanagement, the people put all their hope on the centrist Partido Popular (PP) who, in the final months of the socialist administration, promised not to raise VAT or reduce pensions. 

But the scoreboard remained static; nothing was happening. And soon, the team fell into an all too familiar lethargy on the field, as if resigned to the futility of their pipe dream. The crowd seemed to feel it, too. The team no longer controlled the mid field so convincingly.

This too is what happened once the PP were voted in. The impetus with which they had started their administration soon petered out. Their campaign promises turned out to be empty promises when the very first thing they did was raise taxes. 

In the end, the outcome was predictable. Madrid put up a last ditch effort that came up just short, losing by a 3-4 goal aggregate. It was too little, too late. Players apologized and lamented their misfortune by stating that they had left their skin on the pitch and given it their all. The fans left disappointed and angry.

As with politics, the ones who end up suffering and footing the bill for the mismanagement caused by club officials are the fans, not the executive committee, not the managers, and certainly not the players. All will still get paid their millions, just like the public officials and bankers who dragged us into this mess in the first place. And with thick-skinned unabashedness, they will tell you they are deeply sorry.

You want to know about Spanish politics? Watch a football match, any match.

A lesson not learned

Today Spain raises its VAT from 18 to 21 percent in an effort to increase government revenues and decrease the budget deficit. If history has taught us anything it's that all previous increases failed miserably in achieving the desired result.

Seventy-three years ago today, German troops invaded Poland and plunged the continent into the darkest five years anyone had ever experienced. In Europe alone the total number of casualties (civilian and military) was well over 15 million.

Today Spain is being plunged into darkness with the value added tax being raised from 18 to 21%, its highest level ever. The centrist Partido Popular (PP) government of Mariano Rajoy insists that extreme measures are necessary in order to reduce the budget deficit and foreign debt. While this may true, the real reason has more to do with credibility, or as I like to call it, creditability - the ability to pay back your loan commitments and thus secure further funding. At this stage of the game the blunders in fiscal mismanagement are so compounded that world financial markets have serious misgivings about Spain's ability to meet its monetary obligations. In other words, while Spain is making all the right moves in the eyes of Germany and the European Central Bank (ECB), the rest of the world believes these measures are too little, too late. The result is a risk premium hovering the 6 percent mark, extremely high for a developed country especially when you consider Germany's risk premium is zero.

So the question has to be, if Spain is complying with all the fiscal controls demanded of them, why is there such lingering doubt in financial markets?

Spain's current sitution

The graphic on the left pretty much explains it all. Currently (2012), unemploy-ment stands at 25% with over 5 million people without jobs. Of these, over 2 million have been out of a job for over two years. And there are over 1.5 million households with no income whatsoever. In a country of only 40 million people, this is tantamount to total social and economic collapse.

Furthermore, this Microsoft report from 2011 finds that 99.88% of the registered companies in Spain are SMBs, which is to say, companies with less than 250 employees and with annual revenues below 50 million euros. However, in Spain, 96% of the registered companies have annual revenues below 2 million euros; 53.9% have no registered employees. This means that the majority of companies are "mom and pop" stores: the butcher, the pharmacist, the cobbler, the auto mechanic, etc.

In other words, these companies do not have extensive financial resources and are living at the edge of their monetary capabilities because the products and services they offer are price volatile and subject to the laws of supply and demand.

Therefore, as financial analysts see it, the increase in VAT and other prime commodities will most likely decrease overall revenues. Some analysts estimate government projections will be off by 2 billion euros due to an overall decrease in consumer spending.

As if to prove the analysts right, the latest consumer reports from the National Statistics Institute (INE) state that retail sales decreased by 6.5% in July.

What's even more amazing is that this is not the first time the VAT has been increased. Two years ago, under the administration of socialist president Jose Luis Rodriguez Zapatero, the opposition Partido Popular launched a massive information campaign against Zapatero's increased VAT (from 16 to 18%) initiative. The campaign cited how previous attempts at raising the VAT ended in economic disaster for the administration of Felipe Gonzalez back in 1993 and eventually led to his defeat in the 1996 elections.

So, if the strategy of raising the VAT did not achieve the desired results in 1993 and again in 2010, why is it now deemed the correct response and being forced on the people yet again? The PP has even gone to great lengths to remove all vestiges of their previous "No más IVA" (No to higher VAT) campaign from the Internet but social networking sites have kept photographic records of the PP's top echelon working the streets to get people to sign the petition.

One possible explanation
This time around Rajoy's austerity measures will have no more of a positive effect than in previous attempts. If Rajoy has paid attention to history he can expect unemployment and business closures to rise.

However, one would think that the logic is sound: if government needs money, raise taxes; if it needs to reduce expenses, cut social programs and services. Or is it sound reasoning? Judging from Spain's track record it would seem not, and yet the same strategy is being employed over and over again. Clearly, raising taxes and cutting social programs is not the answer. It hasn't worked in the past, it won't work now. Therefore, the problem lies elsewhere. These problems are deeply rooted in a flawed state system of autonomous regions and a failed business model of an economy solely dependent on real estate speculation and development. A simplistic approach to a complex problem is, at best, a band aid solution.

I won't go into the problems here because it would take more than a blog to explain and would cover several pages of macroeconomic data, the analysis of conflicting cultural attitudes and a historical approach at attempting to explain the lack of national unity. I can however say that the negative figures presented in the graphic above will only be exacerbated.

In the end, Germany may be appeased by the measures Rajoy is implementing. Their loans will be repaid, they'll make money and will continue to be Europe's economic powerhouse. But at what cost to Germany and to Spain itself?

When the dust from this economic fallout finally settles in Spain, how much will have been destroyed in terms of production, employment and wealth? This time around, how many casualties will this European crisis claim?

Those who don't remember the past are condemned to repeat it.

Spain: land of the mediocre

Yesterday I posted an opinion on Facebook sent to me by a friend. It is a well written, auto critical piece of introspection of the current situation in Spain. I translate it here for my English speaking friends. I do not know who authored it.

Perhaps the time has come for us to finally accept that what's going on in Spain is more than just an economic crisis. It goes beyond laying blame on political parties, banking greed and financial mismanagement or the risk premium. Our problems will not end with the changing of the political guard, the imposition of financial controls or the threat of general strikes. It is time to admit that the problem in Spain is not Greece, the euro or Angela Merkel. It is time to accept that we have become a country of mediocrity.

No country attains this level of deficiency overnight or in three years. It is the result of a chain of events that starts with the educational system and extends to the ruling class. We have created a culture in which average is rewarded - in school, in the office, in the media and in politics.

We are so comfortable with mediocrity that we have accepted it as the natural state of things. The excellence we have demonstrated in sports only serves to obscure and deny the reality of the situation.

- Mediocre is a country whose people watch an average of 134 minutes of teletrash daily.

- Mediocre is a country that, in its 34 year democracy, has not produced a single president capable of speaking English or of having some semblance of knowledge of international affairs.

- Mediocre is the only country in the world that, in its desire to be sectarian, has even managed to divide associations of victims of terrorism.

- Mediocre is a country that has reformed its educational system three times in three decades to the point of having the least prepared students in the industrialized world.

- Mediocre is a country who does not have a single university in the top 150 of the world and whose best scientists must seek opportunities abroad.

- Mediocre is a country with a 25 percent unemployment rate, and yet, is able to feel disgust because its neighboring country makes fun of its sporting figures.

- Mediocre is a country where a person's ingenuity is viewed negatively, where creativity is marginalized and where independent thinking is villified.

This is a country that has converted mediocre into the great national hope and aspiration, sought after by youths whose only goal is to be selected to join the next edition of Big Brother, by politicians that insult without providing a single solution, by bosses that surround themselves with simpletons to disguise their own shortcomings and by students who ridicule those that show initiative.

Mediocre is a country that has allowed, celebrated and promoted the triumph of the average, sidelining excellence with two options: leave or assimilate yourself in that unstoppable gray tide of mediocrity.

Spain, what next?

Spain's risk premium hits an all time high while the disgruntled public takes to the streets. What are the implications and how does it affect you?

Spain is experiencing massive daily demonstrations with no let up in sight. And this is just the beginning.

I've been ranting it for the past several months - raising all kinds of taxes while making drastic public spending cuts in an effort to reduce the budget deficit will only produce more unemployment and Chapter 11s, the exact opposite of what the government wants to achieve.

Rajoy says that they had no alternative but to take these difficult steps in order to save Spain from itself. In his State of the Nation speech to Congress last week, he reiterated that the decision to raise taxes and cut spending was undertaken in consultation with the private and banking sectors and was the correct decision regardless of how difficult it might be.

See, I don't buy the part about how difficult it was to make this decision. On the contrary, they took the easy way out...the easiest way out. In a business, if you have to reduce your losses, the first thing you do is cut expenses - a dollar saved is a dollar earned. That relationship is direct: when you reduce your cost by one dollar, you increase your profit by one dollar. Secondly, if the market can bear it, you raise your prices. This is the easiest and most time-honored way to minimize losses.

Government operates the same way. If the deficit exceeds an acceptable level, reduce operating costs and increase revenue. However, unlike the private sector which raises prices ONLY IF THE MARKET CAN BEAR IT, government doesn't give a hoot whether the public can bear it until it blows up in its face. When you're faced with 25% unemployment, the last thing you do is raise taxes. The market cannot bear it.

According to NationMaster.com, as of 2010, Spain had approximately 24 million people between the ages of 20 and 65 (the workforce), while the remaining 16 million were either retired or too young. If, of that 24 million work force, 25% is out of work, then it is clear to see that one-half of the population works, not only for itself, but for the other half. Since 95% of private sector companies in Spain are SMBs, it is safe to assume that these people are not millionaires. In fact, the average yearly wage of people in the private sector is normally between 24 and 30000 euros.

Spain is the fourth largest economy in the eurozone yet its wages rank only 15th in all of Europe (see graphic upper right hand corner). Spain's has a higher internet connection cost than France, Germany and Holland. All this only goes to show that the Spanish people can ill afford any tax increases as envisioned by this administration.

I've always maintained that the difficult decision, but the right one, would have been to reduce taxes and reduce costs. Make the country attractive to foreign investment, don't kill it.

At present, Spain's risk premium is at 593 points or 5.93% for seven year government bonds, 5% for two year bonds. These are ridiculously high premiums to be paying, but it reflects the level of uncertainty that exists. It is generally accepted that the panic point is 600 points. I have no doubt we will surpass it.

Europe will have to pour more money into Spain that much is clear. Furthermore, the current situation (recession) will extend way beyond the 2014 target the government is setting for itself, which is wishful thinking.

What I can say for certain is that Spain has the potential of dragging the whole of Europe into a deep recession. And if that happens, the rest of the world will be affected because imports from developing countries (SE Asia and Africa) will be greatly affected. The bigger scenario is that the world could end up in the worst depression since 1929.

Speculative politics accentuate innate nescience

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.

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.