|bloodstar, Economics on July 12th, 2012 at 09:17 by bloodstar|
Spain has decided to increase taxes and cut spending. While this may make the Austerity hawks happy, Spain is effectively saying that the best way to get out of a depression is to further cut demand and increase unemployment (which is currently hovering at around 25%). To put this in perspective Spain was sitting at around 8% unemployment at the start of 2008. For further perspective, the Deficit for Spain was running around 3.8% of the GDP before the Great Recession. During the Great Recession it broke 9% of the GDP. The Eurozone demanded 6% but the austerity cuts only brought the deficit down to 8.5%.
Will these new cuts bring the deficit towards the target goal? maybe slightly, but every time there are further cuts in spending, additional headwind is generated for economic growth. Technically Spain had an increase in the GDP in 2011 (a rather paltry 0.8% growth) which means it was finally out of the Recession. But the previous austerity measures have pushed Spain back into recession as of June. As it stands, the new measures will only serve to deepen the blow.
As I mentioned above, Spain is facing pressure from the Austerity Hawks to reduce the deficit. In addition, Spain is facing a competitive disadvantage with exports. They simply cannot get costs down enough to be competitive at this time. Countries with their own currency could devalue their currency, which would make imports more expensive and exports less expensive. However Spain, as a part of the Euro, does not have that option. Neither can Spain use inflation as a means to devalue, as once again, they do not have their own currency and the current inflation policy for the eurozeone is set by Germany, who is setting inflation rates as low as possible for their benefit, and to the detriment of countries in crisis, such as Spain.
So what does it mean? Well, the ‘cure’ will likely worsen the disease, increasing unemployment further, drive down the GDP further, and depress tax revenues, leaving the government dealing with a higher deficit relative to the GDP, even if you decrease the deficit by 20 percent, if the GDP declines 15 percent, you’ve only gained a net 5% decrease, add into it that you’ve got a million more people out of work and an economy that is cycling down into a deflationary spiral, and at some point, something has got to give.