The Results of Spain’s Conservative Austerity Program Are In –

Why Did Those Imposing This Program on Spain Expect Anything Else?

European Leaders apparently have no obvious grasp of the obvious.  They have set as their main economic target not economic growth, or increased employment but a decrease in government deficits.  As a result, in countries like Spain they have implemented the following policies.

Aiming to narrow its budget deficit to 4.5% of gross domestic product, from around 9% of GDP in 2011, the government has raised income and sales taxes, slowed the growth of pension payments and cut unemployment benefits. Public administrations have also been discarding workers, cutting back purchases and putting a brake on investment.

So what happened?  Exactly what any C- student in Econ 101 would have predicted what would happen.

Spain's unemployment rate reached a record 26% in the fourth quarter, the latest sign of deepening recession even as growing investor appetite for the country's government bonds brings relief from the country's debt crisis.

Oh, that happened.  What else?

This week brought another negative number from the Bank of Spain: The economy contracted 1.7% in the fourth quarter from the same period of 2011, its worst quarterly performance in more than two years. And the International Monetary Fund weakened its forecast for Spain's economy by 0.3 percentage point, saying it anticipates a 1.5% contraction this year.

But wait, if the policy is so bad, how does one explain this?

The downturn contrasts with recent signs of investor interest. Spain this month has sold about 15% of its bond-issuance target for 2013.

The yield on 10-year Spanish government debt is now about 5%, the lowest since March of last year, according to Tradeweb.

Spanish banks, which were shut out of wholesale financial markets for most of 2012, have issued billions of euros in new bonds in recent weeks.

Easy explanation. The European Central Bank and other European countries have said they will not let Spanish creditors fail.  So no, Spain will not be able to borrow in pubic markets and pay back its outstanding debt.  But with a nice rich European Central Bank behind it, it won’t have too.

Will European leaders ever learn the lesson that austerity and contraction leads to contraction?  Don’t look like it, does it.?  But then the ones forcing this policy on Spain and other countries are doing very nicely themselves, so why should they care if unemployment in Spain is 25%.  They are not part of the 25%.