The EU debt crisis moves to a new location.
The socialist-inspired traveling circus more commonly known as the EU debt crisis is moving from Greece to Spain. Last Friday, Spanish Prime Minister Mariano Rajoy announced that a deepening recession in that country would make it impossible to meet the EU-mandated deficit reduction target of 4.4 percent of GDP for FY2012. He proposed a target of 5.8 percent instead. The latest "readjustment" is similar to the one that occurred in 2011, when Spain's target of 6 percent gave way to the reality of 8.5 percent. Ironically, Rajoy made his announcement on the same day 25 European leaders signed a fiscal pact--aimed at strengthening budgetary discipline among its member nations.
Yet it is the choice between budgetary discipline that would require previously prepared sanctions against Spain, or once again making them an exception to those rules that reveals the EU's Catch 22 dilemma: new sanctions would undoubtedly induce further unrest in a nation already beset by a 22.85% unemployment rate and an economy that has contracted economy by 0.3% on a year over year basis. On the other hand, another exemption to supposedly rigid budget rules would likely undermine confidence in the EU's overall recovery plans, as yet another incarnation of "too big to fail" would be playing itself out on the world stage.
The actual numbers are daunting. In 2011, Spain's national and state governments spent $120.72 billion more than they took in during 2011. This is only a modest reduction compared to the $129.75 billion budget deficits the country ran in 2010, underscoring the reality that austerity measures imposed on that nation have yielded precious little in the way of genuine savings. Adding to the uncertainty is the fact that two-thirds of the current shortfall was accrued by the nation's regional--and autonomous--governments. Absent the ability to compel regional governments to fall in line, the idea that Spain's national government can meet fiscal targets imposed by the EU appears dubious at best.
Yet if the EU insists that Spain adhere to the promises it made on December 30th, an additional $33 billion of deficit reduction must be found on top of the $19.8 billion in savings already accrued from a combination of $11.9 billion in spending cuts, and $7.9 billion in tax increases. That number represents a staggering increase of 167 percent of additional austerity measures imposed only two months after the original pledge. In addition, Spanish economic output will fall 1.7 percent this year, making a mockery of the 1 percent drop recently forecast by the EU, along with the 1.5 percent predicted by the Bank of Spain only two weeks ago. And unemployment is now expected to hit a mind-boggling 24.3 percent in 2012.
Rajoy insists that Spain remains within the proposed EU guidelines because it intends to meet the public deficit goal of 3 percent of GDP by 2013. Yet it reportedly rankled many EU leaders when the Prime Minister publicly announced his intentions without first holding private negotiations with the European Commission. Last November, the European Commission demanded the power to override budgets enacted by individual EU nations, and its members are no doubt irked by Rajoy's characterization of his failure to meet the 2012 guidelines as a “sovereign decision by Spain.”
An official not authorized to discuss the issue described the move as reflective of Rajoy's political inexperience. “He thinks that most of the people around the table are political allies who will support him," the official said. "But here you put your political considerations away because the dynamic that counts is that of national interests.”
More like supra-national interests. All but two of the EU bloc's 27 leaders (Britain and the Czech Republic were the holdouts) signed on to the latest fiscal compact, aka the "Treaty on Stability Coordination and Governance in the Economic and Monetary Union," which requires member states to enact a "Balanced Budget Rule into national legal systems through binding and permanent provisions, preferably constitutional... subject to the jurisdiction of the Court of Justice of the European Union." Furthermore, any nation found to be in breach of budget targets can be subject to "a lump sum or a penalty payment appropriate in the circumstances and that shall not exceed 0.1 % of its gross domestic product... payable to the European Stability Mechanism," or, in some cases "the general budget of the European Union." The pact must be ratified by a minimum of 12 EU states to take effect.
Despite this effort, the commission remained non-committal regarding Spain, noting that it could not render a decision until it got more information regarding why the country will miss its deficit targets, and until it has seen Spain's latest budget proposals. Moreover, Spain is not the only problem on the horizon. Despite championing the need for the kind of fiscal discipline outlined in the current treaty, the Netherlands predicted a budget gap of 4.5 percent for 2013, which is 50 percent greater than the 3 percent limit set out in the latest treaty.
Thus, the notion expressed by many European leaders that the EU debt crisis has largely abated remains a pipe dream. Despite the nearly $1.3 trillion of funds injected by the European Central Bank (ECB) into Euro zone banks in recent months, a Greek-style meltdown of Spain, the EU's fourth largest economy, would required more money than that total to stay afloat. And despite all the happy talk regarding Greece, the $173 billion bailout deal for that nation has yet to be finalized.
And so it goes. The most obviously predictable fiscal train-wreck in the world continues on, seemingly unabated by trillions of dollars of Keynesian-inspired "stimulus" spending whose proponents insist is the only way out of the current crisis, even as they insist that austerity programs are anathema to recovery. They are half-right, yet it is precisely that half-rightness that reveals the insidious nature of socialism: it is the expansion of the state, and the overwhelming number of people thoroughly accustomed to the dependency mindset, that has destroyed the kind of entrepreneurial spirit among those who desperately need private enterprise growth to rescue them. This spiritual debasement, courtesy of state-sponsored self-entitlement, is the dark underbelly of an ideology that can only survive until it runs out of other people's money to spend. How do those "other people" acquire that money?
By utterly rejecting the socialist ideology that disdains the accumulation of wealth--even as the socialists demand a "fair share" of such wealth to continue underwriting their ideological--and fiscal--bankruptcy.
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