Global Crisis Blog

Spain — Could You See It Coming?

By Shlomo Maital

There is a powerful domino effect in global markets.  One nation dives into crisis, and as it solves its problem, crashes into another country, which in turn dives into crisis.  Since 1994, the list of dominos falling has been:  Mexico (1994), Thailand (1997), (Indonesia, and much of Asia),   Russia (1998),  Brazil (2000),  Argentina (2001),  U.S. (2007),  now Greece (2010), and perhaps, next?   Portugal?  Spain?  Greece is a small country, with only 11 m. people. Spain is a huge country, and if it goes into crisis, the magnitude of the problem will be orders of magnitude bigger.  Spain has 40 million people and a GDP of some $1.5 trillion.

The basic problem with the European Union is that it has no non-crisis mechanism to help member countries in trouble — only emergency bailouts.  Monetary policy is made for the whole EU.  That leaves individual governments only with fiscal policy. But when deficits soar, that too is effectively neutralized, leaving no real way to stimulate the economy.   With the EU very slow to engineer bailouts, largely because of German reluctance,  crises become full-blown before the EU takes action.

This year, 2010, Spain’s GDP will decline, at a time when most countries are experiencing renewed growth.  Spain’s budget deficit will remain at 10-11 per cent, its level in 2009.  In the first quarter of this year, Spain’s unemployment rate topped 20 per cent, the highest it has been in 13 years.    Like Greece, Spain’s government is socialist. Its socialist Prime Minister Zapatero has been slow to react to the crisis and to take the painful measures needed to address it. As a result, Standard & Poor slashed Spain’s credit rating on April 28, making Spain’s debt servicing costs even higher.   You could see it coming.

Global capital markets are quick to punish countries unable to restore fiscal stability by inflicting pain.  Like dominos, one country falls after another.  This is especially true in the post 2007-9 global crisis, when owners and investors of capital are hyper-sensitive to risk.  Governments must realize that unless they run their countries’ budgets in a sound and responsible way, unless they treat their country as a business and engineer turnarounds (as companies do when their revenues slump),  they will face rapid flights of capital and soaring risk premiums.