Spain Tries to Save Itself as Prospects Slip Away

Prime Minister Mariano Rajoy said high bond yields may kill any chance that government-driven austerity measures can cut deficits enough for the nation to finance its own needs. At about the same time he made the comment, his own national statistics bureau said industrial production fell 5.1% on an annual basis in February. Rajoy has nearly run out of reasons for the global capital markets to have confidence in his plans. That is because there are none.

The press and some economists like to say that Spain is the next Greece. Spain’s problems remain much worse than Greece’s, though. A bailout of Spain would cost many times what the Greek one did. And, of course, if Spain falls, maybe Portugal and Italy do as well, the common argument goes. The new rescue facility set by countries in the European Union is now more than $1 trillion, but that may be inadequate. Leaders in the region believed that the funds were so huge that capital markets would not question their legitimacy as a set of firewalls. That lasted about two weeks, if Spain’s bond yields are any indication.

It has been said often, but it is worth repeating: Spain’s economy has begun to contract at a furious rate. Not only is unemployment above 22%, factory production is down to a large extent because Spain’s partners in the EU have weak economies and are poor consumers of the southern European nation’s exports. Those same dynamics apply to Portugal, and to a lesser extent to Italy.

Most policy makers, politicians and economists believe that the recession in Europe will be mild. So far, even projections from the International Monetary Fund and the Organisation for Economic Co-operation and Development show a decline in the region’s gross domestic product of only a very modest 1% or 2% this year, followed by a weak recovery. Those assessments have begun to change very recently. The IMF today called the near-term prospects for global recovery troubling. “The global outlook … is pretty grim still,” senior IMF economist Rupa Duttagupta said today. The primary reason for the IMF’s concern is the situation in Europe.

The near-term prospects for the weakest economies in Europe are hopeless. The case that has been made often and forcefully that the tremendous bailout funds set for the region be used for stimulus has been firmly rejected.

In light of recent events, how can anyone argue that austerity by itself will solve most of Europe’s problems? No single part of this set of debates is new. Their ugly settlement is just much closer at hand.

Douglas A. McIntyre