Spain has announced its budget that imposes more austerity that emphasizes spending cuts over revenue:
Government ministries saw their budgets slashed by 8.9 percent for next year, as Prime Minister Mariano Rajoy’s battle to reduce one of the euro zone’s biggest deficits was made harder by weak tax revenues in a prolonged recession. [..]
“This is a crisis budget aimed at emerging from the crisis … In this budget there is a larger adjustment of spending than revenue,” Deputy Prime Minister Soraya Saenz de Santamaria told a news conference after a marathon six-hour cabinet meeting.
Spain, the euro zone’s fourth largest economy, is at the centre of the crisis. Investors fear that Madrid cannot control its finances and that Rajoy does not have the political will to take all the necessary but unpopular measures.
Madrid is talking to Brussels about the terms of a possible European aid package that would trigger a European Central Bank bond-buying program and ease Madrid’s unsustainable borrowing costs. [..]
The measures continue to heap pressure on the crisis-weary population and are likely to fuel further street protests, which have become increasingly violent as tensions rise and police are given the green light to use force to disperse crowds.
A quarter of all Spanish workers are unemployed and tens of thousands have been evicted from their homes after a burst housing bubble in 2008 and plummeting consumer and business sentiment tipped the country into a four-year economic slump.
I’ve always opposed austerity as the solution to the global debt crisis and the strictures of the common currency make it particularly ill-suited to the euro periphery. Efforts to deflate Spain into competitiveness raise the prospect of many years of wage cuts and property price falls that will necessitate ever larger fiscal transfers from the stronger countries, either directly or via pan-euro institutions like the central bank.
Five years into the worst financial crisis in generations we are starting to see how effective various policies have been. Spain, the UK and the US offer three interesting test cases, each dealing with the after effects of a real estate bust in different ways:
· Spain = austerity with tight money (austerity, no devaluation, no quantitative easing, market interest rates too high)
· UK = austerity but with loose money (austerity, currency devaluation, quantitative easing)
· US = no austerity with loose money (no austerity, stable currency, quantitative easing)
Activity in both the UK and Spain remains well below its pre-crisis level – suggesting the benefits of the UK printing its own currency may not be as great as might be supposed. It appears to be the lack of austerity in the US that is the distinguishing aspect of a successful policy mix.
With overall unemployment at 25% and the rising cost of food through increases in value added taxes (VAT), the many of the Spanish poor and unemployed have resorted to scavenging for food shocking many of their fellow citizens:
MADRID – On a recent evening, a hip-looking young woman was sorting through a stack of crates outside a fruit and vegetable store here in the working-class neighborhood of Vallecas as it shut down for the night.
At first glance, she looked as if she might be a store employee. But no. The young woman was looking through the day’s trash for her next meal. Already, she had found a dozen aging potatoes she deemed edible and loaded them onto a luggage cart parked nearby. [..]
Such survival tactics are becoming increasingly commonplace here, with an unemployment rate over 50 percent among young people and more and more households having adults without jobs. So pervasive is the problem of scavenging that one Spanish city has resorted to installing locks on supermarket trash bins as a public health precaution.
A report this year by a Catholic charity, Caritas, said that it had fed nearly one million hungry Spaniards in 2010, more than twice as many as in 2007. That number rose again in 2011 by 65,000. [..]
The Caritas report also found that 22 percent of Spanish households were living in poverty and that about 600,000 had no income whatsoever. All these numbers are expected to continue to get worse in the coming months.
About a third of those seeking help, the Caritas report said, had never used a food pantry or a soup kitchen before the economic crisis hit. For many of them, the need to ask for help is deeply embarrassing. In some cases, families go to food pantries in neighboring towns so their friends and acquaintances will not see them.
Expect to see more demonstrations like these as hunger increases: