Troika Sending Spain Down Same Dismal Path as Greece

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Troika Sending Spain Down Same Dismal Path as Greece

 

Saturday, July 14, 2012 / by Jack Crooks / Money and Markets
 
In what appears to be another déjà vu all over again move by the Troika (European Central Bank, European Union, International Monetary Fund), they have likely ensured Spain will exit the single currency.
 
Why? The economic policy elixir consistently doled out by the Troika has proven lethal for Greece . And it is the exact same formula they are making Spain swallow!
 
The key problems facing Spain :
  • Banking crisis,
  • Budget deficit
  • Soaring unemployment
The chart below depicts problems 2 and 3:
 
 
 
The problem with the Troika’s policy prescriptions is that they are so darn simplistic and do not take into account the powerful impact of profit incentives to grow an economy. In short, the bureaucrats in Europe, just as the bureaucrats in the United States , never seem to understand the power of the invisible hand of the market ... a phrase coined by Adam Smith.
 
According to Smith, by trying to maximize their own gains in a free market, individual ambition benefits society, even if the ambitious have no benevolent intentions. Or put another way, give a person an economic incentive and good things will happen. Take away those incentives, and see the economy merely as a data set, and you miss what makes economies grow. The Troika sees only data sets, it seems.
 
So, in their infinite wisdom, the Troika has told Spain that if you want us to bailout your banks, you will have to destroy your economy. Well, they didn’t say it in exactly those terms, but that will be the net impact of the Memorandum of Understanding the Spanish government was forced to sign this week.
 
The Troika’s favorite two words are “structural reform.” This means the government must make draconian cuts to its budget while at the same time increasing taxes. On paper, this makes sense. In the real world it doesn’t work when your economy is already reeling in the midst of crisis.
 
For Spain , structural reform means increasing Value Added Taxes (VAT) — a tax on consumption — from an already whopping 18 percent to 21 percent and slashing 65 billion euros from the public deficit. In addition, they’ll cut unemployment benefits and civil service pay.
 
This is exactly the policy Greece was forced to follow in order to get the bailout designed to put their economy on track for growth. Prior to the rescue, Greece ’s economy was growing at around 1.6 percent annualized.
 
 
According to Troika forecasts, there would be some blowback on Greek growth as they implemented this policy to ultimately reduce debt levels and pave the way to nirvana. And they estimated Greece ’s GDP would fall about 1.1 percent. Instead it cratered 6.9 percent annualized back in 2010.
 
The Troika policy crushed the Greek economy because it drained credit, forced unemployment up, and hurt businesses given the rising tax burdens. The result was sharply higher bond yields, which meant Greece could no longer borrow on the open market.
 
Now, on top of that ...
 
Spain Is Starting from a Worse Position Than Greece Did!
Spain’s growth is already a negative 1.2 percent annualized before trying to implement Troika reforms. And unemployment is much higher in Spain than it was in Greece before Troika “structural reforms” pushed unemployment up even more.
 
 
Greece is on the verge of becoming completely ungovernable. And since the Troika has launched Spain down the very same path, you can expect to see the following for Spain :
  • Rising unemployment rates
  • Cratering growth rates
  • Rising bond yields
 
Add it all up and you’ll agree that it’s leading to Spain ’s exit from the single currency (aka euro).
 


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