The Corner


Writing for the Daily Telegraph, Ambrose Evans-Pritchard takes a quick canter through Spain’s recent history:

…Spain is prostrate because EMU [monetary union] policy settings have been ruinous for most of the past decade. Interest rates in the mid-2000s were far too low for the needs of a dynamic catch-up economy. Real rates were -2pc for year after year. That is, 750,000 homes were built in 2007 for an annual market of 250,000.

Nope, one size did not fit all.

The Bank of Spain tried in vain to check the flood of cheap capital from North Europe. Madrid ran a primary surplus of 3pc of GDP in 2007. Public debt fell to 42pc (Germany was 65pc at the time). Yes, Spain could have done more. It could have adopted Hong Kong controls on loan-to-value ratios on mortgages – 80pc, 70pc, 60pc, etc, until you choke the boom – but that is not what the EU or ECB said at the time. The EU Council gave Spain three gold stars and commendation that year, saying its “budgetary strategy provides a good example of fiscal policies”. Honeyed words, even as intoxicating credit was reaching red alarm levels.

No, no, Ambrose, it was the bankers’ fault…Wicked Wall Street, dastardly Anglo-Saxons, you know how it goes…

Europe’s Maquina Infernal has since switched tack, inflicting slow deflation instead. The ECB – not content with monetary blunders alone – has become the enforcer of a pro-cyclical fiscal blunders as well. It told Spain and Italy to slash spending as the quid pro quo for bond rescues last summer. Spain complied. Italy’s Silvio Berlusconi demurred, understandably since Italy was already near primary budget surplus. He was summarily toppled.

The damage from this double-barrelled contractionary shock on a fragile Spanish economy is before our eyes, conforming with precision to textbook time-lag theories. Private sector credit has fallen for 18 consecutive months. Industrial output fell 7.5pc in March. Brussels expects the economy to shrink 1.9pc this year, with the crunch yet to come.

Unemployment has reached 24.4pc, or 32pc in Extremadura. More than 1.5m households have no earner at all. They have exhausted their benefits, surviving on savings and – for now – on €420 a month in back-stop support.

Faced with such woes, any sovereign country would call for full engine reverse with every policy lever. The Faustian Pact of EMU allows no such escape. Europe has ordered premier Mariano Rajoy to cut the budget deficit from 8.9pc to 5.3pc in a single year, four times the therapeutic pace.

He cannot devalue. He cannot cut rates or print money. He cannot mobilize a lender of last resort to eliminate all risk of sovereign default. He can only lament…

And that, of course, was always the idea.  


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