Friday, July 13, 2012

Correction: Spain and the EU

I have to make a correction. Also I have to give a break-down. I have to—there is an honesty gun pointed at my head.

First, Spain is still in deep—er, y'know. I previously said that its economic structure sort of made it an exceptional case, but it seems that Spain is still a major economy close in turmoil. What is going on with Spain anyway? Well, in typical Spanish fashion, the old party was swept out of power and a new party came into power led by Rajoy.

Then when it became evident that the new government really didn't have many tools to address the economic woes of the country, support dropped off a cliff. Big surprise. And Spain is a big economy. It would be like having Texas declare bankruptcy. Greece and Portugal are like Maine and South Dakota, it would be tough but everyone could hobble along. Losing Texas would be devastating.

And that is what the Eurozone is facing right now. The thing is that the governments are struggling to create stimulus in their country. Instead they are hoping that by contracting government spending and showing economic discipline the markets will rebound.

Sometimes that might be a decent solution. Here however that is not the case. Think of it like this. Businesses and consumers in Europe have slowed or stopped their spending and growth until the economy gets better. This results in a hole in spending. To counteract this something has to fill that hole. Filling the hole does two things, it loosens up cash allowing spending and it creates confidence that there is control over the markets.

Right now, the governments are refusing to fill that hole, instead relying on the European Central Bank to create monetary policies to address the issue. That only works as a stop gap. Fundamentally it is important to restore confidence and create robust policies that ensure the money goes someplace useful. The ECB is out of its scope and depth while the European governments continue to hem and haw over the correct course of action.

It's ridiculous to assume that people will suddenly feel like the markets are looking up if the governments continue to stonewall each other in procedural quagmires.

I'm just happy that the US has a streamlined political system where important policies can be crafted in a bipartisan manner to alleviate our woes. Thank God there aren't any people out there that think tying a noose around our necks to suffocate spending is the best way to restore consumer confidence. Or that creating benefits and tax breaks for people/institutions already sitting on loads of cash that they will never spend is a good idea.

That would be ridiculous right?