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.

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.

Early 20th century Europe - Part I

Germany's rise and fall - a brief history of Germany from the end of the 19th century to the end of WWI

Editor's note: While researching the subject my laptop went kaput, and with it, all my saved links to sources and bibliography. I apologize as I intended to include a list of sources at the end of the post. Additionally, this post only serves as a prelude to a future post I plan to write about Berlin in the 1930s.

By 1930, the world had become a much smaller place. The phone, radio and wireless provided what was then instant communication. Talking movies and photography were becoming an art form onto themselves. Advancements in flight, motoring and shipping opened new and faster modes of travel. A new world order was emerging and the old continent was learning how to cope amid wars and internal conflicts.

After the first world war, the geo-political map of Europe had changed significantly as borders were redrawn with the emergence of new nations. Some of the old powers lost stature while others gained in importance and authority. Of these, the most affected was Germany.

A prelude to war
Prior to 1871 Germany did not even exist as a unified nation. It was a loosely knit federation of duchies, grand duchies, principalities and city states of germanic origin. It was Otto von Bismarck who in 1871 united all the territories and created the nation of Germany under the umbrella of Prussian authority. The new nation encompassed areas of Poland, the Baltic States and parts of Denmark. Additionally, it had wrested control of the Alsace-Lorraine region from France after the latter's defeat in the Franco-Prussian War of 1870.

At the time, Germany was the most industrialized country in Europe outproducing all other European countries in coal, iron and steel, thanks in large part to its annexation of the Alsace-Lorraine region, principal source of metal ores. They were science and technology innovators making important contributions in physics and chemistry. In the first quarter of the 20th century Germany had produced more Science Nobel laureates than any other country. The Otto engine was the blueprint for all internal combustion engines and people like Einstein, Planck, Daimler-Benz, Bosch, Wankel, Diesel, Geiger and Hertz became household names.

As part of their growing importance in Europe, Germans embarked on the task of colonization. Although latecomers to the game, they established colonial outposts in Africa and Asia. Colonization served two purposes: it reaffirmed Germany as a world power which brought with it prestige and clout, and secondly but more importantly, it meant Germany had a powerful naval armada with which to defend its colonies. Britain, seeing their naval dominance challenged, retaliated by strengthening their navy. The result was the 'Dreadnought race' between Britain and Germany towards the end of the 19th century.

Tensions rising
Serbia had rebelled against the Turkish Ottoman Empire in 1815 and declared its independence by 1835. At the time, large parts of the Balkans were under the control of the Austro-Hungarian Empire and the emperor feared that Serbian independence would create similar aspirations in Bosnia-Herzegovinia and Dalmatia. Hence, the emperor, Franz Joseph I, was more than a little wary of the Serbians.

Meanwhile, the 19th century saw shifting alliances and realignment among Europe's traditional powers. After France's botched imperialistic aspirations during the Napoleonic Wars at the start of the 19th century, the victors distributed the spoils of war among themselves in the Second Treaty of Paris. Generally speaking, when a peace treaty is signed after any conflict, it means that all parties concerned have reached a compromise that pleases no one and annoys everyone. Eventually, problems with the Ottoman Empire, the creation of Bulgaria and the independence of Serbia resulted in the Triple Alliance (1882) of Germany, Austria-Hungary and Italy. As a counter measure, Britain, France and Russia formed the Triple Entente. Basically, member states were committed to come to the defense of their partners in the event of foreign invasion.

To say that these alliances were in a state of flux is an understatement. No one trusted anybody. To make matters worse, the monarchs of Russia (Nicholas II), Germany (Wilhelm II)and England (George V) were all blood related. In fact, George V and Nicholas II were first cousins and could have passed for brothers while Wilhelm was the first cousin of George and second cousin of Nicholas. Italy, after joining the triple alliance, made a separate deal with France while present day Turkey (Ottomans) would align with Austria-Hungary.

The powder keg
Eventually, the inevitable happened. The assassination of Archduke Franz Ferdinand in Sarajevo by a Serbian ultra nationalist was the straw that broke the camel's back. It was the perfect excuse Austria needed to declare war on Serbia. However, because of the alliances, other countries were committed to the conflict. First to join the fray was Russia which, in addition to coming to the aid of their Serbian cousins, had its own political agenda in wanting to grab the Dardanelles from the Turks, and thus, secure a direct access to the Mediterranean from their Black Sea ports. France, having no direct interest in the Serbian conflict, did see an opportunity to engage Germany in an attempt to regain control of the Alsace-Lorraine region. Britain entered the conflict when Germany decided to invade neutral Belgium to get to France. Eventually, all of Europe got involved one way or the other. The war was largely stalemated although Germany maintained a slight advantage. However, it was evident they could not sustain a two-front war. The turning point came when the Americans joined the Allied effort and supplied troops and war materiel.

The end
The rest, as they say, is history. By the time the war ended, three empires had disappeared from the face of the earth. Austria had been reduced to a shadow of its former glory, the great Romanov dynasty which had ruled Russia for over 300 years was no more and the Ottomans vanished. The Russian debacle was particularly tragic, mainly because Nicholas insisted on going to war when his country was ill prepared for it. Nicholas had never been properly trained by his father on matters of state. On top of this, he was wholly reliant on his wife, the Tsarina Alexandra of Hesse-Darmstadt, who was German by birth. While the rest of the world was instituting political reforms brought about by the new realities of the industrial revolution, Nicholas and Alexandra remained supreme autocrats eschewing all kinds of socio-political reforms. The situation was further exacerbated by the condition of Alexei, crown prince and heir to the throne, and the influence Gregory Rasputin held over the royals, especially the Tsarina.

The end for Nicholas and Alexandra came after they were twice betrayed. First by Wilhelm II who facilitated the exiled Lenin's return to Russia hoping (rightly so) that this would stir anti-war sentiment among the disgruntled people, and secondly by George V who promised the Romanovs asylum in England which was later revoked upon the advice of his ministers.

As mentioned earlier, after the war, the geo-political map of Europe had changed. The Treaty of Versailles of 1919 imposed heavy penalties on Germany which was blamed for instigating hostilities. Besides having to retreat to its pre-1871 borders, Germany faced strict restrictions on its military build up and was bound to pay extensive war reparations which were finally paid off in 2010.

Some sources used:
- Great Events of the 20th Century - Readers Digest
- Timeline of History
- George, Nicholas and Wilhelm: Three Royal Cousins and the Road to World War I -    Miranda Carter
- Iron Kingdom: The Rise and Downfall of Prussia 1600-1947 - Christopher M. Clark
- The Complete Idiot's Guide to World History - Timothy C. Hall

Eurodebt graphic

All week I've been posting threads on the state of Spain's economy. This graphic clearly illustrates the situation of the PIIGS states.

A picture is worth a thousand words.

Eurodebt graphic