Spain's Flat Spin Continues as GDP Falls

The notion that Spain’s economy could recover from the current flat spin on its own always was wildly improbable. The country does not have the means, either in its manufacturing, financial or service sectors, to recover without aid. Those facts were driven home when the nation’s INE statistics agency announced that second-quarter gross domestic product fell 0.4% from the first quarter and 1.3% from the second quarter of last year. Without a single reason to think a recovery might be possible, Europe faces another financial problem that cannot be solved by the government involved. But that has been true for some time.

Spain’s problems, stacked on one another, make a large pile. Unemployment stands at about 25% — closer to 50% among the country’s young people. The collapse of real estate markets and the drag this has had on banks makes the U.S. housing problem tame in comparison. Spain’s government cannot field a stimulus program as America did in 2008. Its deficit and debt are too great to do so. And as much as the government would like to set such a program, its neighbors — particularly Germany — will not approve one.

Germany, the European Central Bank and most other EU countries have resumed the endless debate about whether Europe’s central bank should buy the paper of the region’s weak nations to keep down borrowing costs. But borrowing costs are still a minor problem compared to crippled economies that become more crippled by the day. Even if the proposed European Stability Mechanism (ESM) can be funded and replace the temporary European Financial Stability Facility (EFSF) and the European Financial Stabilisation Mechanism (EFSM), the hundreds of billions of dollars put into that newer pot will not be used, at least based on current plans, for any aggressive stimulus work. Among the reasons for that is financially well-off nations — particularly Germany — claim governments that could not control their budgets in the past cannot control them in the future. Stimulus money cannot be effective because the governments that would receive it cannot combine it with frugality and efficient programs to move money into an economy where even the collection of taxes is a problem.

The risk of not putting money into a stimulus program for Spain is greater than the risk that Spain will spend the money wastefully. The cost to bail out Spain entirely may be too expensive for its neighbors. Perhaps if capital markets and businesses inside Spain saw some support for a recovery, the chance of recovery would lessen anxiety about the country’s future. But the chances of that already have fallen by the wayside.

Douglas A. McIntyre