Instead of running from the bulls in Pamplona, bureaucrats in Spain may soon be running from their creditors. As if the angry demonstrations in Madrid and Barcelona during the May Day socialist holiday weren't enough, the economic news continues to worsen. Standard and Poor's took one look last week at the diminishing prospect that Spain would pay off its financial obligations and dished out a downgrade with a negative outlook.
It's hard to blame S&P, since Spain's 24 percent unemployment rate is the highest in Europe, and the economy shrunk 0.3 percent in the first quarter. Prime Minister Marino Rajoy and his government are dealing with a fiscal imbalance equal to 8.5 percent of gross domestic product. They must undertake significant cuts, not just increase taxes. There's no indication Madrid has the will to do what it takes to restore the nation's financial health.
Instead, the European Central Bank (ECB) and other financial institutions have fallen back on the usual bailout playbook. Despite pumping in around a trillion dollars, the European debt crisis is spreading. The fiscal compact between European Union nations is on the verge of collapse as governments face protesting populaces. The Dutch government has already fallen. Greece is stuck in the same mire it has been for the past two years and more. European inflation is creeping up. Even with the massive infusion of liquidity, the continent's banks face a credit crunch.
Keynesian disciples, including former Treasury Secretary Larry Summers and New York Times columnist Paul Krugman, look at what's happening on the other side of the Atlantic and argue Europe's big spenders simply aren't spending enough. Both economists prescribe further stimulus instead of austerity for Spain. Mr. Summers even argues that - aside from Greece - Europe has no profligacy problem, pointing to Spain's relatively low debt-to-GDP ratio as evidence. This analysis ignores Spain's massive fiscal deficit and the shocking unemployment rate. As should have been learned from the 1970s and the more recent stimulus effort in the United States, government spending creates lasting debt, not worthwhile jobs. There is no reason to believe that Spain, with its far more rigid labor markets, would have a more positive outcome from more stimulus.
ECB Chairman Mario Draghi has signaled that Europe's monetary spigot might be turned off soon and the focus changed to growth-oriented policies. Growth is indeed the only solution. Unfortunately for the eurocrats, growth requires giving up significant power. The private sector will have no room to expand unless the intrusive regulation from Brussels and the lavish welfare systems in each member country - particularly those in the South - are scaled back. It's no accident that Germany, one of the countries that instituted labor-market reform prior to the crisis, has weathered the storm better than its neighbors. Excessive red tape discourages entrepreneurs from investing and creating jobs. Likewise, a large welfare state comes at an enormous cost in terms of the tax burden and a reduced incentive to work.
Unless Madrid comes to its economic senses, Spain will be the next to fall.
The Washington Times
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