Dêem à austeridade uma chance: vá lá! (3º e último post: Espanha)

Spain

 

This might be the most interesting chart of them all.  Spain used a period of strong economic growth to reduce the debt to GDP.  That is probably a more impressive case for how growth can reduce the debt, rather than a case of austerity helping growth.  The debt to GDP ratio is low in any case, but Spain does seem to push  more on to regional governments than other countries and has been a big fan of guarantees rather than actual debt, so that should be kept in mind.

Then in early 2008, growth dropped significantly.  It was definitely experiencing problems a bit earlier than other countries.  It swung to big declines in GDP that were only reversed when the global economy turned, and with excessive spending – just like Italy. 

The weird thing about Spain is how growth failed to take hold in 2010 even as spending increased.  In fact, spending continued to increase, yet growth didn’t materialize.  It wasn’t again until at least the middle of 2011 that any form of austerity was happening in Spain, yet the failure to “grow” in response to spending occurred earlier.

Certainly some of the same explanations that apply to Italy, apply here, namely that too much money was spend to hide a problem, rather than address it, so growth didn’t follow spending, and now the debt burden is impeding everything.  Maybe there is some element of payback for the huge deficit spending designed to get the economy growing again, that just didn’t work longer term?

Spain has the added question of whether the growth in the early part of the decade was too high, and since Spain and Spanish banks have done everything to avoid recognizing the bursting of the property bubble, maybe the downturn in growth occurred much earlier, or the 2008 recession was much worse, and it is only now slowly but surely being leaked into the data.

Spain raises many issues, but after the massive increase in spending for growth in the 2009-2011 period failed to achieve a meaningful growth rate, and let debt continue to pile up, maybe 1 quarter of a new government, whose policies have barely taken force, should be given a bit more time, before embarking back on the failed policies of growth at all costs that have helped create the problem.

Conclusion

Neither spending nor austerity is universally good or bad.  Each has short term consequences and potential long term consequences.  Bouncing back and forth between them is highly unlikely to produce a useful solution.  A plan needs to be developed.  It needs to minimize short term pain of austerity while ensuring future obligations that are manageable.  Obviously neglected areas where some spending has an incredibly high likelihood of generating more growth than it costs should be targeted, but assuming it is easy to achieve growth is a fallacy.  Finding the right investments to get long term growth is difficult.  And long term is the key here.  Austerity will hurt GDP this quarter, and maybe next.  Spending will help this quarter and next, but without taking into account future constraints caused by debt service and debt repayment, the spending will only make things worse.  This is a difficult time.  It took years, if not decades to create this mess, and will take years to fix, and spending alone won’t help, because growth is not that easy to find.  If it was, there would be 1000’s of companies like AAPL, but there aren’t, and it is less likely the government will find growth than companies.  Sadly, it seems like the politicians, media, and the markets have latched on to the idea that growth Is the key and is highly likely to be successful.  Kicking the can was a disaster for Greece as the situation got worse and worse, and is still awful, and Europe is now heading down this path under the hallucination that they can create growth above and beyond the debt created to achieve it.