The Pain in Spain Drags Europe Down the Drain - Part 1
Spain's austerity measures cause pain for the Spanish people. These austerity measures were imposed by officials of the European Union, of which Spain is a member. The Spanish people don't like the pain. They are protesting and will continue to protest. As they do, officials of the EU continue to demand more austerity measures.
That pretty much sums up the economic battle being fought right now in Spain.
Meanwhile, the pain in Spain threatens the European Union. Why? Because Spain is considered a "core" nation as opposed to a "peripheral" nation in the European Union. Greece and Ireland - two countries that have already hit the financial wall and whose economies are in depressions are examples of peripheral nations.
Spain, on the other hand, is considered a core nation. That designation is mostly based upon the fact that Spain is one of the bigger countries in the EU. So, simply, when a bigger country in the EU gets into economic hot water, it causes more problems than when a small country does. It's just basic common sense.
When the economies of Ireland and Greece collapsed, everyone said that the EU could survive intact as long as the core countries remained strong. Indeed, EU officials continuously claimed that the core countries - while they might experience some banking problems and would have to face difficult decisions - were not going to face the kind of economic crisis that Ireland and Greece have experienced.
The EU officials were wrong. Spain is headed for - if not already in - a depression. Its banks need to be "rescued," witness the recent injection of $100 billion into the Spanish banking system just to keep Spanish banks afloat. Meanwhile, any Spanish citizen who can manage it is sending money out of the country, so there is effectively a massive "run" on Spanish banks - meaning that people are pulling money out of those banks and sending it to banks outside Spain. So Spanish banks are just about ready ready to collapse. Banks whose customers take out all their money don't do well. As a result, the $100 billion isn't going to be enough to save Spain's banking system. Back to the people.
As the Spanish government applies the austerity measures that the rest of Europe demands, the people who live in Spain demonstrate, even riot, in protest against these measures. Without getting bogged down in the details of every citizen and union's gripe, what it all boils down to is this: the Spanish government provided entitlements to its citizens now and promised them many more in the future.
The government had to borrow massively to provide the entitlements they provided in the past. The government's revenues were woefully inadequate to fund whatever entitlements they provided, but providing those entitlements allowed Spanish politicians to be re-elected - whether those politicians were labeled liberal, conservative, socialist...whatever.
As for the promises the government made of entitlements for the future, there was never any realistic expectation that revenues in the future would be any more adequate than they were in the present. But the politicians who were borrowing to fund present entitlements simply assumed that they would be able to continue to borrow in the future, should revenues prove inadequate.
To sum up, the Spanish government gave entitlements and promised entitlements to its citizens that it could not and will not be able to afford. Politicians - who should have known better (and perhaps some did know) - just kept borrowing money so that they could keep the citizens voting for them.
To say the Spanish government was not living within its means would be putting it mildly.
Meanwhile, every other EU country pretty much followed the same script.
Now picture all the European governments sitting on top of growing mountains of debt. And picture the interest due on that debt growing and growing. If this picture starts to appear absurd, if it seems to you that schemes like this cannot continue forever, you're right. At some point, these governments would have to face the music.
When those "peripheral" countries first faced the music, it created a bit of an uproar, but remember that the economies of Ireland and of Greece are a lot smaller. So in facing the music, while the EU was shaken, it wasn't shaken "to the core." It would take Spain to do that.
And now that Spain - one of the EU's "core" nations - is facing the music, the EU is indeed shaken to the core. And so you now see the countries of the EU trying to force the Spanish government at least begin to live within its means. The Spanish politicians now tell their citizens they can't have all those entitlements they've gotten used to. They tell their citizens they won't be able to have all those entitlements that they were promised in the future. The Spanish citizens don't like being told this. Having something that you got used to taken away isn't pleasant. That's the pain in Spain.
In Part 2, we'll look at how the pain in Spain may drag the rest of Europe down the drain.
That pretty much sums up the economic battle being fought right now in Spain.
Meanwhile, the pain in Spain threatens the European Union. Why? Because Spain is considered a "core" nation as opposed to a "peripheral" nation in the European Union. Greece and Ireland - two countries that have already hit the financial wall and whose economies are in depressions are examples of peripheral nations.
Spain, on the other hand, is considered a core nation. That designation is mostly based upon the fact that Spain is one of the bigger countries in the EU. So, simply, when a bigger country in the EU gets into economic hot water, it causes more problems than when a small country does. It's just basic common sense.
When the economies of Ireland and Greece collapsed, everyone said that the EU could survive intact as long as the core countries remained strong. Indeed, EU officials continuously claimed that the core countries - while they might experience some banking problems and would have to face difficult decisions - were not going to face the kind of economic crisis that Ireland and Greece have experienced.
The EU officials were wrong. Spain is headed for - if not already in - a depression. Its banks need to be "rescued," witness the recent injection of $100 billion into the Spanish banking system just to keep Spanish banks afloat. Meanwhile, any Spanish citizen who can manage it is sending money out of the country, so there is effectively a massive "run" on Spanish banks - meaning that people are pulling money out of those banks and sending it to banks outside Spain. So Spanish banks are just about ready ready to collapse. Banks whose customers take out all their money don't do well. As a result, the $100 billion isn't going to be enough to save Spain's banking system. Back to the people.
As the Spanish government applies the austerity measures that the rest of Europe demands, the people who live in Spain demonstrate, even riot, in protest against these measures. Without getting bogged down in the details of every citizen and union's gripe, what it all boils down to is this: the Spanish government provided entitlements to its citizens now and promised them many more in the future.
The government had to borrow massively to provide the entitlements they provided in the past. The government's revenues were woefully inadequate to fund whatever entitlements they provided, but providing those entitlements allowed Spanish politicians to be re-elected - whether those politicians were labeled liberal, conservative, socialist...whatever.
As for the promises the government made of entitlements for the future, there was never any realistic expectation that revenues in the future would be any more adequate than they were in the present. But the politicians who were borrowing to fund present entitlements simply assumed that they would be able to continue to borrow in the future, should revenues prove inadequate.
To sum up, the Spanish government gave entitlements and promised entitlements to its citizens that it could not and will not be able to afford. Politicians - who should have known better (and perhaps some did know) - just kept borrowing money so that they could keep the citizens voting for them.
To say the Spanish government was not living within its means would be putting it mildly.
Meanwhile, every other EU country pretty much followed the same script.
Now picture all the European governments sitting on top of growing mountains of debt. And picture the interest due on that debt growing and growing. If this picture starts to appear absurd, if it seems to you that schemes like this cannot continue forever, you're right. At some point, these governments would have to face the music.
When those "peripheral" countries first faced the music, it created a bit of an uproar, but remember that the economies of Ireland and of Greece are a lot smaller. So in facing the music, while the EU was shaken, it wasn't shaken "to the core." It would take Spain to do that.
And now that Spain - one of the EU's "core" nations - is facing the music, the EU is indeed shaken to the core. And so you now see the countries of the EU trying to force the Spanish government at least begin to live within its means. The Spanish politicians now tell their citizens they can't have all those entitlements they've gotten used to. They tell their citizens they won't be able to have all those entitlements that they were promised in the future. The Spanish citizens don't like being told this. Having something that you got used to taken away isn't pleasant. That's the pain in Spain.
In Part 2, we'll look at how the pain in Spain may drag the rest of Europe down the drain.
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