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May 27, 2012

Echoes of DOOM: Spain on the brink [Fritzworth]

Yeah, I miss Monty's regular DOOM posts here -- he had some of the best links and commentary on the various economic disasters on the horizon. I like to think that Monty is now in a repurposed missile silo somewhere in North Dakota, sitting on a stack of saddlebags filled with Krugerrands, looking up at the monitors every now and then when the motion sensors detect a jackrabbit or antelope. Sigh.

In the meantime, this article by Ambrose Evans-Prichard -- while not easy to read and chock full o' obscure jargon -- makes it clear that (a) Spain in on the brink economically and (b) the fault lies not with Spain but with the behavior mandated by the European Central Bank (ECB).

The damage from this double-barrelled contractionary shock on a fragile Spanish economy is before our eyes, conforming with precision to textbook time-lag theories. Private sector credit has fallen for 18 consecutive months. Industrial output fell 7.5pc in March. Brussels expects the economy to shrink 1.9pc this year, with the crunch yet to come.

Unemployment has reached 24.4pc, or 32pc in Extremadura. More than 1.5m households have no earner at all. They have exhausted their benefits, surviving on savings and - for now - on 420 a month in back-stop support.

Faced with such woes, any sovereign country would call for full engine reverse with every policy lever. The Faustian Pact of EMU allows no such escape. Europe has ordered premier Mariano Rajoy to cut the budget deficit from 8.9pc to 5.3pc in a single year, four times the therapeutic pace.

He cannot devalue. He cannot cut rates or print money. He cannot mobilize a lender of last resort to eliminate all risk of sovereign default. He can only lament. "Europe has to come up with an answer because we can't go on like this for long," he said.

While the common (and largely correct) wisdom is the the PIIGS were living high off the Northern European hogs, Evans-Prichard's contention is that Spain, at least, was denied the monetary policy tools it needed to restart its economy or at least glide it in to a soft landing. Instead, it appears to be in full nosedive mode, with someone else's hands locked onto the controls.

Ever seen those videos where someone throws a brick or other heavy object into a washing machine? Slow one down by a factor of 100 or so, and that's what's happening in Europe. It's precisely the slowness of the destruction that keeps people -- including those in charge in the European Union -- thinking that things might turn out OK after all. But the slo-mo demolition is going on regardless, and we're just about at the point in the video where another piece of the washer is going to go flying off at a tangent. Put on your safety helmets, boys and girls -- we're not a safe distance from the washer. ..fritz..

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posted by Open Blogger at 10:08 PM

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