Friday, August 3, 2012

New Data From Spain Shows Austerity is Working Exactly the Way It is Expected to Work

Just Not the Way Policy Makers Wanted It to Work

It is becoming increasing difficult to determine if European policy experts who are imposing severe austerity of countries like Spain are doing so out of ignorance, arrogance, or just plain meanness.  Spain recently elected a center right government that has embraced austerity and deficit reduction as a way to get the economy moving and a way to cut the deficit.

Basic economic theory says that this will not work.  Reductions in public spending will produce unemployment, lower income, lower economic activity and ultimately lower rather than higher revenues.  The result, the worst of all worlds, an economy that neither balances the budget nor improves the lot of its citizens.  The laws of economics are like the laws governing gravity.  Not believing in them doesn’t make them inapplicable, just like not believing in the law of gravity does not mean a person will survive a 150 foot fall onto the sidewalk.

So the results in Spain are a surprise only to those people who for some reason believe they are not governed by the rules.  For the rest of us these results are exactly as expected.

MADRID—Spain's central government reported a new deterioration in its finances and struggled to impose budget discipline on the country's restive regions as data showed a surge in capital flight from the euro zone's fourth-largest economy.

The central government in Madrid said it had a budget deficit equal to 4.04% of gross domestic product in the first half, up from 2.2% a year earlier, as tax revenue remained weak and Madrid moved to extend emergency support to the country's financially ailing regional and municipal governments.

So no, the deficit is not getting better.  What about the rest of the economy?

Citing severe liquidity strains, Catalonia's government has delayed July payments for social-service providers, including hospitals and retirement homes. As many as 100,000 employees could suffer payment delays as a result, local media say. Spanish regions are responsible for over a third of spending in the highly decentralized country, including politically sensitive areas such as health and education.

Nonetheless, in a new sign of waning investor confidence, data from the Bank of Spain showed a new surge in capital flight from the country's economy and financial system.

Net outflows reached €41.3 billion ($50.6 billion) in May, compared with a net outflow of €9.6 billion in the corresponding month last year. Portfolio investment, which includes investments in public and private debt instruments, also posted an outflow of €9.2 billion, driven primarily by foreigners taking that investment money out of Spain.
Spanish families and companies also pulled some of their deposits out of Spain, removing €1.8 billion, while €606 million from foreign companies and families flowed into the country, the Bank of Spain said.

Don’t look so good there either.

Of course, it would not be very polite to point out that those advocating the polices that are producing the above results in Spain, along with massive unemployment are they themselves well off, with great government jobs, great salaries and wonderful government paid benefits. 

So we will not point that out.

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