Spain has a deficit target of 6.3% of GDP in 2012 and Luis Maria Linde, CB (Banco de España) CEO doubts it will be reached.
At the end of October, the value investor Mohnish Pabrai gave a presentation and took part in a Q&A session at Boston College and Harvard Business School on the Uber Cannibal Investor Framework, which he has developed over the past decade. Uber Cannibals are the businesses “eating themselves by buying back their stock,” the value Read More
This is more or less the American focal point of criticism of European policy.
If a country spends a lot of public money, that money will eventually end up in wages, salaries and business profits that are taxed – thus ultimately balancing the budget more or less all on its own accord. Conversely cutting budget and shrinking the public sector will lead to less income and the attempted budget balancing will not be achieved, because tax revenue decreases.
That is a fairly solid argument in a large – mainly closed economy as the American: America could economically live without the rest of the world. That the US doesn’t is another matter.
The major difference is the question of foreign trade. In a small – and open – economy like the Spanish a stimulus will lead to increased imports and increased cost in exports, so the competitiveness goes into the toilet – and the budget deficit becomes a national deficit because imports rise and exports drop.
In case of Spain it has a rather bad ability to compete. So every stimulus is liable to make the balance of payment deteriorate – and that deficit has to be funded somehow.
You can have a small and open economy and still not care about your cost level and productivity – like Norway – but they are a major oil producer – pocketing handsome taxable profits.
Russia is an example of a large – and relatively closed economy – with a major oil revenue (2/3) of the Russian taxes are export taxes, so they can – in the event of rising oil prices stimulate pretty much as they like – and they do. On the other hand dropping oil prices really put the squeeze on.
All this both the Spaniards and the EU knows.
The problem arises from the stimulus that has over the years been coming from the financial sector wasting money into bad debt from building to expensive and useless houses.
Much of that earlier stimulus has ended up in deposit (until they fled the country) – financed in part by tax-evasion – both cash and as pensions. And these losses will have to be financed, which they can’t – forcing Spain to balance the public budget in the originally described downward spiral.
That is precisely what the EU want! To make Spain tax the pensions and tax-evaders, as those money is precisely NOT being spend in consumption (partly because the investments they are placed in are lost).
Now the US administration is correct in saying that saving is not a very good way of fighting a crisis – the EU – agrees; but points out (together with Christine Lagarde of the IMF), that what should be done is to tax those funds, that are just sitting there.
Nothing advanced; but definitely not the popular politics: Chopping pensions and going after tax-evaders – so the political will is rather to strangle the economy in order to save the banks.