Austerity is destroying the Spanish middle-class:
Here’s just a brief summary of the ugly statistics: (1) The government in Madrid expects the economy to shrink by 1.7% in 2012 – its third contraction in four years. (2) Unemployment continues to rise. It is now more than 23%, and youth unemployment is above a staggering 50%. (3) Housing prices are down 22% from their peak, and are likely to continue to drop, perhaps by 20% or more. This puts extreme pressure on the balance sheets of an already shaky banking sector.
Obviously, this is an economy in severe distress. And what is the government’s response? More growth-killing austerity. In late March, it announced its most severe package of tax hikes and budget cuts yet, aiming to reduce the deficit by $36 billion. What gives? Madrid is extremely worried about the state of its national finances. It missed its deficit target in 2011, and, without the latest austerity package, would have done so again in 2012.
However, the austerity drive is failing to achieve what it aims to do: improve Spain’s financial position and rebuild investor confidence. Instead, investors have been spooked by the deterioration of the Spanish economy. Demand for Spanish government bonds was weak in a Wednesday auction. Since the government announced its latest austerity budget, yields on its bonds have risen, a sign that investors see them as riskier. Yields on 10-year bonds jumped over 5.6%, the highest since January. And why is that? Well, by tanking the economy, the austerity measures are making Spain’s financial standing weaker, not stronger. Despite its new austerity budget, Madrid estimates that the government-debt-to-GDP ratio will INCREASE in 2012, to nearly 80% from 68.5% in 2011. Simply put, Spain is moving backwards.
Cheer up, though, sooner or later, Spain will have a better-than-expected quarterly GDP number and Bobo will start talking about the “Spanish miracle” and what we can learn from it.