Close X Cookies are necessary for the proper functioning of 24hGold.com. By continuing your navigation on our website, you are accepting the use of cookies.
To learn more about cookies ...
EnglishFrench

Spain's Unpleasant Choice: Accept Lower Wages, Leave the Euro and Default

IMG Auteur
Published : November 16th, 2012
840 words - Reading time : 2 - 3 minutes
( 3 votes, 5/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...

 

 

 

 

On the near 100% probability that Germany will not voluntarily give money to Spain, nor will Germany voluntarily modify its trade policies, the choices facing Spain are quite bleak.

Michael Pettis, writing for Carnegie Europe describes Spain's unpleasant choices in
Spain Will be Forced to Choose.

In the great debate over the economy we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to Spain.

t is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.

Because once they joined the euro the rest of Europe had no control over the value of their currencies and the level of their interest rates. It was inevitable that European countries that had joined the euro with a higher-than-average level of inflation would be forced to respond to German trade surpluses either by forcing up unemployment or by running the large trade deficits that corresponded to Germany’s trade surplus. No other choice was possible.

These deficits, as a matter of economic necessity, had to be financed with loans from Germany, leaving Spain with an enormous debt burden. Just as Spain could not run a trade deficit without borrowing from abroad, Spain can only repay its debt if it runs a trade surplus. What is more, since rich Spaniards are taking enormous amounts of money out of the country in order to protect themselves from the debt crisis they know is coming, the Spanish trade surplus must be large enough to accommodate both flight capital and debt repayments.

In practice there are only three ways Spain can achieve a sufficiently large trade surplus. The first way requires that Berlin reverse those policies that forced a German trade surplus at the expense of its European neighbors. Berlin must cut taxes and increase spending so much that Germany runs a trade deficit large enough to allow Spain to run the opposite surplus, which it must do if it hopes to repay the debt.

If Germany does not move quickly to reverse its trade surplus, Spain only has two other ways of creating a trade surplus in spite of German recalcitrance. One way requires that Spanish wages are forced down by many years of high unemployment. This will allow Spain to run a sufficiently large trade surplus.

Spain’s second option is to leave the euro and devalue. This will immediately force down prices and wages relative to Germany.

Neither option will be easy, but it is important that we realize that if Germany doesn’t adjust, Madrid has no choice but to pick one or the other. Both options will cause debt to soar in real terms, and will probably force Spanish businesses, and even the government into default. But in both cases Spain will begin running large trade surpluses.

As much as leaders in Madrid, Brussels, and Berlin hate to admit it, these are the only three options open to Spain. Any policy proposed by policymakers that is not consistent with one of these three ways will be impossible to achieve.


Simple Math

The only good options from Spain's point of view are for Germany (or Germany and France) to bail out Spain with free money (not a loan) or for Germany to go on a massive sustained spending spree (no doubt accompanied by higher inflation), such that Germany's trade surplus turns into a deficit.

However, those are not options Spain can choose. Those are options that only Germany can choose. The odds Germany voluntarily selects those options are roughly zero percent.

Spain gets to decide between these two choices

1.       Lower Wages Coupled With Still Higher Unemployment

2.      Leave the Euro and Default


For now, Spain has selected choice number one. How long can it last?

Yesterday I wrote
Looking Ahead, Spain Worse Than Greece; Only One Realistic Solution.

The realistic solution of course is to "leave the euro and simultaneously undertake structural reforms" but in spite of 25.8% unemployment, Spain still sees things differently (for now).

Brussels Blinks


The nannycrats in Brussels are starting to get worried because following massive protests in Spain, Portugal, Italy, Greece, and Belgium, the nannycrats decided Spain will not need further austerity measures in 2013.

For details please see
Anti-Austerity Protests Sweep Europe, Sparking Violence; Brussels Blinks, No Further Austerity for Spain; Economic Burnt Toast

However, a one year suspension in austerity is not going to do a thing for Spain in the long run.

Greece has missed budget target after target (see
Greece Allegedly Gets Time, Not Money; Mish Says Time Is Money) and Spain is following smack down the same path.

Eventually Spanish citizens will have had enough and will force a change. The only question is how much pain Spanish citizens can take before that happens.


 

 

Companies Mentionned : Carnegie |
Data and Statistics for these countries : Belgium | France | Germany | Greece | Italy | Portugal | Spain | All
Gold and Silver Prices for these countries : Belgium | France | Germany | Greece | Italy | Portugal | Spain | All
<< Previous article
Rate : Average note :5 (3 votes)
>> Next article
IMG Auteur
Mish 13 abonnés
Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. He writes a global economics blog which has commentary 5-7 times a week. He also writes for the Daily Reckoning, Whiskey & Gunpowder, and has over 80 magazine and book cover credits. Visit http://www.sitkapacific.com
WebsiteSubscribe to his services
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
The Revisionist Theory and Histo...
05 Febovertheedge
"The key is in the hand of the U.S. government. It is the same key that was used to lockthe U.S. Mint to silver in 1873, and to gold sixty years la...
First Report since April, 2014
05 FebS W.
Here I was just 2 days ago thinking whatever happened to that evangelical silver guy. Low and behold up he springs, like some spirit from the g...
LBMA Silver “Price”: A Perfect S...
03 FebS W.
There is no doubt that the Comex can be used as a casino for those who want to trade Silver up/or down or maybe some just wish to take a small punt...
LBMA Silver “Price”: A Perfect S...
30 JanOzSILV1
Bron refuses to EVER admit this market is a Casino and the disconnect between Paper and Physical is a big clue to this
LBMA Silver “Price”: A Perfect S...
30 JanS W.
Usually I enjoy Bron's take on things,but to be perfectly honest, I can't understand 95% of what he his on about here. I get the feeling that h...
ANOTHER NAIL IN THE U.S. EMPIRE ...
30 JanDemosthenes0
Very naive and pretentious article! The author thinks he knows everything and yet knows next to nothing. Shale gas producers are neither stupid n...
LBMA Silver “Price”: A Perfect S...
30 JanOzSILV1
I'd say that this was More than a Farce , 5,000 silver futures contracts within a minute or two !!!!! ( some charts indicate NO increase in Vo...
LBMA Silver “Price”: A Perfect S...
29 JanJ T.
"Criminal" is not the same as "stupid"...and it's not a farce when it is intentional. The only Farce has to do with the criminals in positions of ...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS
Mining Company News
Lara Expl.(Cu-Zn-Au)LRA.V
Revised Resource Estimate Report Filed for Maravaia Copper Gold Deposit
CA$ 0.34+1.47%Trend Power :
Corporate news
Black HillsBKH
Black Hills reports 4Q loss
US$ 50.90-0.59%Trend Power :
Corporate news
Kinder Morgan(Oil)KMP
Midstream Companies Were above the 20-Day Moving Averages
US$ 102.03+1.98%Trend Power :
Corporate news
Kinder Morgan(Oil)KMP
Midstream Companies Were above the 20-Day Moving Averages
US$ 102.03+1.98%Trend Power :
Corporate news
Devon Energy(Ngas-Oil)DVN
Gasoline Inventories Rose Last Week despite Fall in Production
US$ 24.85-6.44%Trend Power :
Corporate news
United States Steel(Fe-Sn)X
U.S. Steel (X) States Ratification of Labor Agreements
US$ 7.94-3.64%Trend Power :
Corporate news
Black HillsBKH
4:34 pm Black Hills Corp beats by $0.04, misses on revs; guides FY16 EPS below consensus
US$ 50.90-0.59%Trend Power :
Corporate news
Black HillsBKH
Black Hills Corp. Reports 2015 Fourth Quarter and Full Year Results
US$ 50.90-0.59%Trend Power :
Corporate news
Transcanada PipelinesTRP.TO
TransCanada to Sign Substantial Agreement to Benefit Québec Economy
CA$ 48.65+0.16%Trend Power :
Corporate news
Devon Energy(Ngas-Oil)DVN
4Q15 Crude Oil Prices: Fallout for the Energy Sector and SPY
US$ 24.85-6.44%Trend Power :
Corporate news
Comments closed