The Greeks implicitly defaulted (officially) on their debt earlier this year. Spain has a simialr problem with unemployment - for Spain, unemployment tripled from 8% to 24% from 2008 to present. Countries like Italy, Ireland and Portugal seem to have been spared from the fates of Spain and Greece because unemployment never reached the +20% level. Some commentary from Mike Shedlock on a recent Spanish event: Excerpts from the article Mike is quoting: From just a purely theoretical stand point of all-things-being-equal - the increase in unemployment Spain has experienced over the past 4 years has reduced government revenue by about 20% of its 8% unemployment level. I don't know how true that is. But I think it goes a long way to explain Ben Bernanke's "deflation is not an option" speech. So, we heard earlier this year that a Greece exit could help strengthen the EU (euro), how about a Spanish exit? An Italian exit? An Irish exit?
The problem, of course, is not spending. The problem arises from the fact that the wealthiest members of any given nation/society (like that even matters to them) twist and abridge the codes that are supposed to govern them. Campaign "donations" cheapen all of us, and leave us open to the predations of those who were born into wealth.
Oh brother. Those girls have more than enough to hold up their pants on their own... Thank you for asking tho.
Spain is too big to fail. They're not going to let Spain leave the Eurozone, period, unless the Eurozone is being disbanded. Spanish austerity is also problematic. In many respects, Spain's problems lie in a domestic real estate bubble gone bad (their own subprime mortgage crisis), and austerity doesn't really solve that, what with the whole confidence-shattering, bank deposit rushing and etc.
I don't think the issue is wholly real estate as much as it is government pension obligations coupled with declining government revenue. It's not only hard enough to pay for pensions when revenue is diminishing but more difficult to do when taxes are eating away at the total number of jobs and the income they pay. What makes it worse is that the European Central Bank is stubborn or plan refuses to purchase (monetize) the debt of the European Nations. Monetizing the debt doesn't seem to be a concern for many of the EU members, especially Germany. I don't think this will drag down the rest of the world but as people/institutions take money out of the EU they will head to the United States and China (even with a declining stock market). Both countries are very large and their central banks act in the interest of the whole not in the interest of one or two individual states - they function better than the other large economies (Brazil, Russia, EU, India).
The first is the reality of all developed countries everywhere, I don't think anybody has come up with a silver bullet for that (short of maybe converting old people to Soylent Green). With that said, both Spain and Italy actually weaned off the famous defined-benefit plans and started funding occupational pensions---more of a hybrid system before even 2008. This was even more stark with drastic pension reform in Italy and Spain after the crisis, who both played the "let's raise the retirement age!" game. Unfortunately, that doesn't tend to move yields down, as we saw in market reactions after the fact. In fact, crimping consumer spending like that when it was already going down (kicking someone already down) probably pushed yields up and government revenue down even further. Then you have messy scenes like this--- <iframe width="560" height="315" src="http://www.youtube.com/embed/MVRJ18oHsa8" frameborder="0" allowfullscreen></iframe> Monetizing the government debt is a huge issue for the Germans. It's the reason why the ECB is a quasi-central bank that for example, cannot perform QE because in its' mandate, it is restricted from basically monetizing government debt (in fact, some Germans will even claim secondary bond purchases to push down yields are beyond the ECB's mandate!) http://ftalphaville.ft.com/blog/2011/11/17/752101/the-ecb-imf-italy-roundabout-switcheroo/ http://www.guardian.co.uk/business/2012/aug/02/ecb-eurozone-crisis-remedy-german-resistance The problem is Germany has such a disproportionate influence on the monetary process in Europe, and they're still stung over the Weimar Republic, to the point where price stability is still the norm for the ECB... Draghi has shown an insistence on "working for the whole of Europe". His statement that the ECB would do "whatever it takes to save Europe" almost ******* saved Europe by itself. <iframe width="560" height="315" src="http://www.youtube.com/embed/Pq1V0aPEO3c" frameborder="0" allowfullscreen></iframe> The problem is the German resistance. Is there need for structural reform? Sure. But European states have trotted out policy reform after policy reform without any result. They need the ECB to bridge the gap. And the ECB has shown it could, and still can do so. Just one hour ago--- http://www.reuters.com/article/2012/09/06/us-markets-global-idUSBRE86F00620120906
And there appears another problem for the ECB: its only means of QE is buying short-term bonds (3-year or less maturity). That type of policy pushes the yield of long-term bonds higher, right now 10-year Spanish bonds are about 6% versus 3% for a Spanish 3-year bond. Even with ECB purchases, unemployment in Spain (and Greece) looks horrible. The left-hand side of this graph is unemployment rate. http://earlywarn.blogspot.com/2012/08/piigs-unemployment-chart.html This is kind of like watching one domino slowly begin to fall after the other. Who's next, because the US Federal Reserve has stated they will keep US interest rates low until 2014 - which implies that they will continue with QE. What effect will QE3 have on the European equity and security markets? I would think at this point Germany and anyone else not willing to amend the ECB's rules should just leave the euro; leaving only those who wish to act the same manner.
The ECB is about buying time. It is the quickest moving crisis management mechanism (although they have stupidly tied it with one of the slowest---the currently being tried by the German Constitutional Court ESM). The probability of needing QE3 decreases if the Eurozone stabilizes. The Fed has made it abundantly clear that it is looking at the Eurozone and the fiscal cliff as the chief concerns hanging over the American economy. Germany is the only one not willing to play by ECB bond buying, but that's not going to be the issue that gets Germany, which has pledged nearly everything for the Eurozone as a political concept, to bow out.
My understanding of Spain is that their biggest problems are in their regional governments, which makes the crisis more difficult to deal with. Instead of the Eurozone bailing out the federal government, the federal government has to bail out regional governments, and then get bailed out by the Eurozone. That makes reform more difficult, because you have a bunch of smaller governments that are less concerned with the Eurozone than their little province - and those are governments that need to change their policies instead just the main one. That said, I don't think Spain is in as bad shape as Greece by any stretch in terms of its economic potential. So while Greece is in a death spiral and this whole austerity thing has zero chance of working there, I think there's at least hope that Spain can fix its ship if interest rates stay reasonable.
