Spain.

[Beet]

They're not quite recovering. And they're not quite holding the line, either. But heck, they're not deteriorating as fast, and that's worth noting.

-- A 17% drop in its central budget deficit. O/c, in the early stages of Greek austerity, the deficit also fell, only to blow out again as the economy began to contract. But so far, at least austerity is cutting the deficit, not growing it.

-- Reiterates it expects to achieve 6% deficit target. In the case of Greece, it was constantly announced that prior targets were going to be missed. The current target has held for some time, although it is still expected to be missed.

-- Lopez Carbajo said an increase in retail sales by large enterprises in recent months may boost value-added tax receipts.

In addition, the government's efforts should be supported by a better-than- expected performance by the country's large social security service, in charge of the pension system, as it would offset part of the central government deficit.

Spain's government said Thursday it anticipates the social security service will post a surplus for the year. In the first nine months of the year, the service recorded a EUR5.1 billion surplus, accounting for 0.5% of Spain's GDP. This surplus came even as overall pension payments rose 5% from the same period last year.

*

On the downside:

-- GDP growth evaporated last quarter.
-- Inflation is still running at 3% per annum.
-- Third quarter unemployment highest in 15 years.

I expect that when the new government comes in, there will be additional labor market reforms, but some stability in the continent-wide situation will be required for these to show effects.

[Beet]

It's amusing that whenever Ireland does well (mid-2000s, now... well now relatively), certain people tend to attribute it to low taxes and deregulation, whereas when Ireland does poorly, they attribute it to government interventions such as the bank rescue. At the end of the day it's a game of make-believe-what-you-want-to-believe and come up with a justification ex post facto.

As for myself I would point to a thread from awhile ago where I looked at just about every country in the eurozone, and the difference between "crisis" and "healthy" is whether said country has a current account deficit (bad) or current account surplus (good). Hum dee dum.

[Beet]

It's amusing that whenever Ireland does well (mid-2000s, now... well now relatively), certain people tend to attribute it to low taxes and deregulation, whereas when Ireland does poorly, they attribute it to government interventions such as the bank rescue. At the end of the day it's a game of make-believe-what-you-want-to-believe and come up with a justification ex post facto.

As for myself I would point to a thread from awhile ago where I looked at just about every country in the eurozone, and the difference between "crisis" and "healthy" is whether said country has a current account deficit (bad) or current account surplus (good). Hum dee dum.

Well that is why I used relative to peers. If I just said look at Ireland it would be one thing. But I pointed out that Ireland was worse than the all of the PIIIGS(minus Greece) last year and is now better than the rest of the PIIIGS today. Anybody looking at the situation would look at what the countries are doing differently.

It is a pretty strong piece of evidence you cannot deny that.

How did this thread become about Ireland? Haha. But yes, it's clear that Ireland is doing relatively better. I just think that it has more to do with Ireland's ability to correct its external accounts in a more timely manner than with its tax policy. Low taxes may help attract outside investment, but the primary driver is if outside companies think the country is a good investment to begin with. You won't invest in a country you think is going down the tubes, no matter how low the taxes are. The evidence I point to is that an examination of Ireland's current account explains not only why it is doing relatively better now, but why it got into a crisis in the first place. An examination of the other PIIGS' current accounts can also explain why they are still mired in problems.

[Beet]

How much more austerity can Spain be expected to take?

[Beet]

23% unemployment?  And we think we have bad on this side of the pond...

Yeah. O/c, in Europe, long term unemployment isn't the personal/financial/social/psychological/career death sentence that it is over here, but still...

[Beet]

Edward Hugh has a good summary of the Spanish situation. I'm reprinting a lot of the charts here, but if you want to read the paragraphs (which you should) you'll have to head over to his blogs-

http://spaineconomy.blogspot.com/

The Root Of Spain's Problem Was The Property Bubble, But The Key To The Solution Is Restoring Competitiveness

"Internal demand in Spain is imploding. This is not surprising, with household debt just under 90% of GDP and private corporate around 120%, it is clear that both sectors badly need to deleverage. Classically the way to do this is by devaluing and boosting exports to sustain growth. But Spain is in the Euro, and has no money of its own to devalue. The common currency makes it very easy to generate distortions, and much harder to correct them. In that sense it is systemically biased towards negative outcomes, something the founders of monetary union didn't give enough thought to. The key institutional stabilisers- a common banking system, a common treasury, and a central bank capable of targeting interest rates on all the participating sovereigns - weren't in place from the start, and even now are considered controversial, so the constituent economies have a lopsided tendency to veer either one way or the other.   "



Clearly here, you see the massive bubble. In 1996, Spain was already a fully developed country with a high standard of living. Yet between then and 2007, household consumption increased from 90 billion to 140 billion euros per quarter. It was not until then that this unsustainable - and credit driven, as we shall see - increase in consumption reached a peak, fell back to 130 billion euros, then stabilized. But the new level is still too high from a national accounts perspective (e.g., it would have to be subsidized in fiscal union)



As you can see, since the crisis Spanish exports recovered rapidly in a V-shape and reached new highs quickly. It is heading in the right direction, but they started at such a low level that it will take several more years for the effect to be decisive.





















Here you see the massive consumption/housing bubble from 1996 was supported by 15-25% annual increase in bank lending for mortgages. Naturally, debt was increasing much more quickly than GDP, but because it was held in the private banking system, the EU rules that covered only government debt ignored this hidden time bomb.





Spain's ability to weather the crisis also depends on the global economy being strong.



Then Hugh goes on to analyze numerous issues facing the Spanish banks including equity issues and similarities vs. differences with Ireland.



Bottom line;

"Obviously accepting that Spain needs a full bailout is going to be hard for the German leadership, but the alternative of Spain Euro exit and default will probably prove even less appetising for them. After several years of neglect and refusing to face up to issues, talk is in the air of internal devaluation to address the loss of competitiveness Spain suffered during the boom, but so far nothing has been done. (emphasis added) Maybe this is the next reform Brussels should be discussing with Madrid, the most recent IMF proposals certainly point in this direction . Beyond all the talking, if Europe's leaders really do want to save the Euro, and not have Spain go back to the Peseta to devalue, then one day or another this internal devaluation will have to happen or the Spanish economy will simply never recover. If it doesn’t recover then the issue will not be simply saving Spain but rather how to save the global economy when the Euro then finally falls apart."

[Beet]

Here is another article on Spain with a more positive take than Edward Hugh's "nothing has been done."

http://www.bloomberg.com/news/2012-05-09/spain-s-stealth-devaluation-goes-unrewarded-by-investors.html

The kicker (for me): "Spain has a trade surplus with France and exports as much as it imports from the euro region, government data for 2011 show. Spanish car imports fell 35 percent from 2007 to 2011 and new registrations slumped 50 percent. Still, auto production declined just 17 percent as exports replaced domestic buyers.

Exports of textiles, machinery and food are the highest on record, government data show. Unit labor costs, which rose 4.8 percent in 2008 even as the economy went into a recession, fell 2.6 percent in 2010 and another 1.9 percent last year, Eurostat data show.
...
After Germany, Spain is the country whose contribution to exports to non-EU countries increased the most from 2007 to 2011, according to World Trade Organization data."

The problem for Spain is that it will take at minimum one to two years of a stable external environment to stabilize its current account, at which point it should in theory not be dependent on external capital to finance its ongoing needs. But the current liquidity crisis is now occurring on a week-to-week basis. If only the northern European countries could see that some degree of fiscal union does not have to mean it will be paying for these countries forever...

[Beet]

To restore competitiveness it's obvious that certain reforms must be done. The problem is the nature of them: when Brussels or the current Govermnent in Madrid talk about reforms usually are talking about savage cuts and hardening working conditions. Nothing has been said about reform our banking system until it was too late. In my opinion the business culture in Spain must be reformed too, despite some succesful examples many of our entrepeneurs have a wrong mentality and are far away of being competitive.

Yes, the banking system's problem is that it caught itself up in a big real estate bubble. But hardening working conditions is pretty much necessary. In a market economy this should happen naturally as unemployment goes up, as those who are desperate to find work will accept harder conditions in exchange for pay. But that Spain's unemployment is 24% and rising suggests the labor market mechanism is broken. Those who are already working are too comfortable, while those who have no work are shut out. Labor market flexibility seems to be the key reform.

In Latvia's successful adjustment, the "real" unit labor cost fell 6.7 pct in 2009, 7.7 pct in 2010, and 3.2 pct in 2011, a total of about 15.6 pct in three years. In contrast, Spain was +1.2 (2009), -3.0 (2010) and -3.2 (2011), so far only adjusted 5 percent. Spain will not need an adjustment as much as Latvia, but compensation as a share of productivity will have to fall to restore competitiveness.

[Beet]

To restore competitiveness it's obvious that certain reforms must be done. The problem is the nature of them: when Brussels or the current Govermnent in Madrid talk about reforms usually are talking about savage cuts and hardening working conditions. Nothing has been said about reform our banking system until it was too late. In my opinion the business culture in Spain must be reformed too, despite some succesful examples many of our entrepeneurs have a wrong mentality and are far away of being competitive.

Yes, the banking system's problem is that it caught itself up in a big real estate bubble. But hardening working conditions is pretty much necessary. In a market economy this should happen naturally as unemployment goes up, as those who are desperate to find work will accept harder conditions in exchange for pay. But that Spain's unemployment is 24% and rising suggests the labor market mechanism is broken. Those who are already working are too comfortable, while those who have no work are shut out. Labor market flexibility seems to be the key reform.

In Latvia's successful adjustment, the "real" unit labor cost fell 6.7 pct in 2009, 7.7 pct in 2010, and 3.2 pct in 2011, a total of about 15.6 pct in three years. In contrast, Spain was +1.2 (2009), -3.0 (2010) and -3.2 (2011), so far only adjusted 5 percent. Spain will not need an adjustment as much as Latvia, but compensation as a share of productivity will have to fall to restore competitiveness.

Beet, wouldn't you agree that there is a problem that there is this kind of unwillingness to reform in countries like Spain (as showcased in that post)? You're usually taking the Krugman stance on the crisis (and I'm not necessarily disagreeing - I'm far from a hardline austerity guy) but can you understand the wariness of Germany et al to pay for countries that might be very unwilling to actually reform?

Yes, absolutely... there is not enough scrutiny on these matters. "Reform" can mean many things, it is more about micro economics than macro economics, and that is more difficult for me to speak to, because I haven't been able to find data as easily. Further, there is implementation risk- you pass a law that looks like good reform, but what is actually happening on the ground? So I agree in principle that it's unfair for Germany et al to pay without reform, but I'd like to see more information on precisely what reforms are needed. It is better to talk about specific changes rather than generalities.

I guess, here is a "specific" article on Spanish labor market reform.

http://blogs.lse.ac.uk/europpblog/2012/04/23/the-reform-of-the-spanish-labour-market-is-politically-costly-and-will-only-bring-minor-economic-changes/

It concludes that passed reforms under PP "heads in the right direction on some aspects but ignores, or only partially deals with, many needed changes." How does it head in the right direction? Well, it "reduce(s) the employment protection of permanent contracts" and "gives individual firms the right to refuse industry-wide wage agreements and allows for new provisions that increase flexibility of the roles and working conditions of workers within the firm."

These are the kind of generalities in micro economic analysis that don't shine enough light, IMO. For an outsider like reading this, who does not understand the Spanish labor market, what exactly is meant by "reduce(s) the employment protection of permanent contracts"? How does it reduce it? The reform will not eliminate Spain's two-tiered employment (permanent versus temp) system, so it cannot be a total reduction. It is difficult to infer from this statement, what precisely the effect would be.

[Beet]

Good mackarole- yields are through the roof. The 2 year yield today exceeded the previous high of Nov. 25, 2011. It looks like Spain will need a full bailout very soon.

[Beet]

FXstreet.com (Barcelona) - From a €-1.7B deficit in the April current account, the Spanish data for May points to a €0.7547B surplus.

Read more: http://community.nasdaq.com/News/2012-07/correction-spain-current-account-at-07547b-surplus-in-may.aspx?storyid=159959#ixzz22bE69jhc

The current account deficit narrowed dramatically in May from a year earlier, to EUR754.7 million as the trade deficit fell by about half and the services surplus increased, the Bank of Spain also said Tuesday.

Spain's current account deficit narrowed from EUR3.4 billion in May 2011. The current account deficit for the first five months also narrowed from a year earlier, to EUR16.9 billion from EUR23.2 billion.

The trade deficit in May narrowed to EUR1.5 billion from EUR3 billion in May 2011, with imports decreasing and exports climbing.

http://online.wsj.com/article/BT-CO-20120731-704629.html

So either a 750 million surplus or deficit, Nasdaq & the WSJ disagree. Either way it is huge news, compared to April's 1,700 million deficit and last May's 3,400 million deficit.

The real adjustments here are definitely happening. Spain just needs to be given time...