The reason why Spain is a riot both financially and socially goes beyond matters of economic policy. Spain faces a graver problem, its political institutions.

Over the past few weeks, Spain has received worldwide attention due to its deteriorating economy and growing outbursts of massive social protests. Most notably, US presidential candidate Mitt Romney said in his debate with President Barack Obama last week that he did not want his country to “go down the path to Spain.”

As the world fixes its eyes on the eurozone’s fourth largest economy, analysts continue to offer suggestions as to how to best tackle the Iberian country’s economic woes. However, the reason why Spain is a riot both financially and socially goes beyond matters of economic policy. Spain faces a graver problem, its political institutions.

Spain’s political establishment: stale and clientelistic

Perhaps the most lamentable element in Spain’s political class is that it is hard, almost anecdotal, to find elected officials with a track record outside the public sector. For too many years, the country has been governed by bureaucrats who have no experience whatsoever in the real world of business. The majority of Spain’s politicians do not know what it is to conceive an idea, to risk one’s own wealth, to deal with banks, workers and suppliers, and, ultimately, to experience failure and success. Sadly, the Spanish taxpayer-financed political establishment understands failure and success only in terms of which side of the aisle their members are seated in parliament.

Furthermore, Spain’s political system is extremely sectarian and clientelistic. The concept of merit among the political class has been perverted into allegiance to the apparatus – and to the right leader within. Future political promises are embraced by parties when they are young and, years later, the chosen ones find themselves making decisions on public policy without ever setting foot in the real world: a group of individuals whose only interest is that of the party which keeps them fed and spoiled. Unfortunately, and to use Daron Acemoglu’s term, this type of “extractive” political institutions have contaminated other areas of civil society as well and have distorted a free society’s vital values of meritocracy and personal accountability from the educational system all the way to the business fabric.

A country governed by the unfit

If former Prime Minister José Luis Rodríguez Zapatero, an inexperienced attorney who joined the Socialist party at the age of eighteen, repeatedly made a fool of himself and of his country by his clumsy appearances abroad and flawed policies at home, it is simply because he was unfit to hold the office to which he was elected. Indeed, Zapatero’s incompetence would be exposed early on his rise to power.

It was in 2003, during his first electoral campaign to Spain’s highest office, when Zapatero’s incompetence to lead the country would be exposed for the first time. A nearby media microphone caught himprivately acknowledging not having a clue as to the economic concepts he had discussed in a speech a few minutes earlier. The microphone caught Zapatero’s then economic advisor in the Socialist party, Jordi Sevilla, pointing the errors the would-be prime minister made during his speech while assuring him that all he needed to know about the economy could be learned over “a couple of afternoons.” The Socialist candidate then responded that, despite his ignorance, he “liked” matters of economic affairs.

After the socialists’ disastrous leadership, the bureaucrat with less-than presidential stature and charisma, Mariano Rajoy, was seen by many as a major ‘upgrade’ to replace Zapatero at the La Moncloa palace. Rajoy entered public service at the age of 23 and served as minister of education and deputy prime minister under the leadership of tax collector-turned-politician José María Aznar.

The Popular party’s leader to succeed Zapatero promised less red tape, lower taxes, an overhaul of the regional government system to limit its size and do away with the – literally – thousands of state companies plaguing the economy, provide tax incentives to entrepreneurs and, all in all, all of the right-sounding policies voters wanted to hear. It took Rajoy exactly ten days since formally being appointed prime minister by the Spanish parliament to begin to betray each and every single one of those promises.

While we have been covering Rajoy’s sinking rate of approval and thequestioning of his democratic legitimacy, perhaps it would be best to illustrate how one of his government’s flip-flop policies have resulted in the country taking a deeper dive into economic abyss and fueling social outrage: the fiscal devaluation that never happened.

Broken promises breaking up the country

During his political campaign, Rajoy promised not to raise taxes, but to actually lower them (while in the opposition he criticized Zapatero, quite rightly, that raising taxes in the midst of an economic recession was irresponsible). A few months after imposing a severe income tax hike across the board, Rajoy’s government announced an increase in the national Value Added Tax (VAT) that would raise such a levy to as much as 21 percent in most goods and services (there are reduced rates for certain types of products and services, but those have also suffered increases). The government would later follow up such a tax increase with a lowering of social security charges for employers. All in all, given the impossibility of executing a policy of currency devaluation, a fiscal devaluation would make the country more competitive in foreign markets and boost exports.

The increased VAT measure is hitting domestic consumption – already suffering from the previous hikes and wage cuts. However, the lowering of social security charges for employers is nowhere to be found. In line with Rajoy’s government’s language, everything is either temporary (tax increases), or soon to come (tax cuts and major reforms). The reality is, however, that the fiscal devaluation that never happened has exacerbated the economy’s downturn: higher taxes have led to higher inflation and lower domestic consumption, which in turn has led to an increasingly stalled economy and higher unemployment.

If, besides an incoherent economic policy, we take into account Rajoy’s poor handling of the ‘banking sector reform’ (an euphemism for a bailout of insolvent banks), his incomprehensible maneuvering around an imminent European sovereign bailout, and the separatist calls coming out of the Basque and Catalonia regions, in less than ten months the Spanish premier may have inflicted more harm to the country than his Socialist predecessor did during his 7-year mandate. In addition, Rajoy is doing a terrible disservice to the solemn ideals he and his political party claim to represent: limited government, economic freedom and meritocracy.

While nobody knows exactly what Rajoy’s economic strategy is, what is hurting the country the most – even risking breaking it apart – is the widespread sentiment that Rajoy simply has no idea of what he is doing.

The Spanish civil society is wise

Many observe that the excesses of the past, for which Spain and other European countries are now paying dearly, largely stem from an imperfect monetary union: a currency which produced a mirage of equality and harmony among highly divergent market competitors. In the case of Spain, the most damaging effect the euro-bubble has caused, however, is that it has helped to mask many of country’s structural problems and has made it possible for a cancerous political class to spread and infect virtually all areas of society. Spaniards, however, are wise and seem to have arrived at the correct diagnosis as to why their country is failing.

Last years’ protests in Madrid’s emblematic Puerta del Sol square gained global attention as then Prime Minister Zapatero was ready to call snap elections and hand over the power to Rajoy. Then, one of the demonstrators’ popular rally cries was “they don’t represent us.” Last week, on September 25, Spanish demonstrators did not protest in a square or sought to “occupy” a bank or the stock market. Instead, they took their protests to the entrance of the national parliament.

When the government tried to criminally prosecute the organizers of such demonstrations before parliament, the judge assigned to the case dismissed it. The judge in question, Santiago Pedraz, wrote in his ruling that the protesters were exercising their right to freedom of speech, and that it was no crime for citizens to call for the members of parliament’s resignation, or even the abolition of the current regime, even when such calls questioned Spain’s current constitutional system. To the surprise of many, Judge Pedraz took his legal argument one step further and framed his decision in the context of the current “decay of the so-called political class.”

Spaniards are now rejecting the cynical notion that the current confiscatory policies that aim to bailout an insolvent system managed by morally-insolvent politicians is anything but “austerity,” and that a petulant government which systematically does the opposite to what it says does not have a place in a free and democratic society.

and.....

http://www.zerohedge.com/contributed/2012-10-06/could-spain-breaks-separate-countries

Could Spain Breaks Into Separate Countries?

Submitted by Phoenix Capital Research on 10/06/2012 08:31 -0400

European Central Bank

Spain was already experiencing a banking crisis as well as a sovereign crisis. It’s now on the verge of a constitutional crisis (as well as its ongoing sovereign and banking crises).

Secession crisis heaps pain on Spain

Spain lurched further towards a full-blown constitutional crisis as Catalonia announced a snap election potentially opening the way for the country’s most economically important region to declare independence from Madrid.

As police in the Spanish capital barricaded the Spanish parliament against anti-austerity protestors, the government of Mariano Rajoy vowed to stand firm against a drive by Catalonia for secession as the Spanish leader faces the most critical period of his premiership.

“The hour has come to exercise our right to self rule,” said Artur Mas, Catalonia’s president. He called the vote, which is likely to be cast as a proxy referendum on Catalan independence, after Mr Rajoy last week rejected his demands for greater fiscal autonomy, triggering a wave of nationalist sentiment in the northern region.

The political turmoil within Spain came amid signs that a German-?led group of eurozone countries were attempting to roll back an agreement reached in June that would free Spain of tens of billions of euros in bank bailout debt.

Under the June deal, Spain’s €100bn bank bailout would be shouldered by the new €500bn eurozone rescue fund, the European Stability Mechanism, rather than the Spanish government.

On paper the ESM will not be given legal powers to take over the bank bailouts entirely until the eurozone politicians have agreed to a federal banking supervision system. But according to senior officials Spain has promised that its bailout will be covered even though it is scheduled to begin in November well before a final agreement.

However, after a meeting between the German, Dutch and Finnish finance ministers on Tuesday, the three said the ESM would not be allowed to take over “legacy assets” recapitalized before the banking supervision system was in place. This calls into question the markets’ assumption that Spain’s bailout and any assets put in the soon-?to-?be-?created Spanish “bad bank” will be covered by the deal.

http://www.ft.com/intl/cms/s/0/901894a6-?0722-?11e2-?b148-? 00144feabdc0.html#axzz27n7hfRTE

As I noted in previous articles, Spain has three options:

1) Spain goes the “Greek route” of agreeing to austerity measures in exchange for bailouts (which will implode the economy).
2) Prime Minister Rajoy refuses to impose austerity measures and is removed/ replaced by an EU technocrat who is pro-?austerity measures (like Italy experienced last year)
3) Spain defaults/ leaves the EU.

Thus far Spanish Prime Minister Rajoy has opted to go for #1. The end result has been riots, protests, and now the threat of Spain as a country breaking up. I’ve long averred that Spain will bring about the break up of the Euro. By the look of things, we’re not far from this.

To whit, as the above article notes, Germany, Holland, and Finland have decided to pull back on the promise of a €100 billion Spanish bank bailout first established in June. These countries are now stating that this bailout should be included as part of the ESM mega-bailout fund’s banking program that could take years to implement.

Spain doesn’t have time for this. As I’ve noted before, Spain is facing a full-scale bank run (Spaniards pulled another €17 billion from Spanish banks in August, bringing the year to date bank run to over 18% of total Spanish bank deposits).

Now add multiple regional bailout requests, as well as 25% total unemployment to the mix and Spain is an absolute disaster. The Spanish Ibex knows it too…

Congratulations Mario Draghi, you promised unlimited bond buying and you bought less than one month’s worth of gains for Spain. If you want proof positive that Central Banks are losing their grip on things, the Ibex is it. The moment we take out that trendline again, it’s GAME OVER (what more can the ECB promise?)

“So what?” many investors will ask, “Spain is nothing in the grand scheme of things.”

Wrong.

Spain’s sovereign bond market is $2.1 trillion in size. And Spanish bonds are used to backstop hundreds of trillions of Euros worth of derivative and credit trades.

So when Spain defaults (and it will eventually) all of these assets become worthless. And all of those trades blow up. Imagine Lehman times ten.

and....

http://soberlook.com/2012/10/55-straight-months-of-job-cuts-in.html?utm_source=BP_recent

WEDNESDAY, OCTOBER 3, 2012

55 straight months of job cuts in Spain's service sector

With Spain's recession deepening, the nation's service sector continues to struggle. Service industries such as hotels and restaurants are caught between rising input costs and falling output prices, as margins become compressed.

Markit: - The Spanish service sector ended the third quarter of 2012 deep in contraction territory. Moreover, September data signalled faster reductions in both activity and new orders as the economic crisis in Spain continued.Higher fuel costs contributed to an acceleration in input price inflation to its fastest since July 2011. On the other hand, companies continued to lower their output prices, despite a rise in the rate of VAT limiting the extent to which they were able to do this.

Source: Markit

Driven by sharp declines in demand, employment is Spain's services sector has been hit especially hard. This is the 55th straight month of service jobs losses.

Markit: - With workloads falling, service providers lowered their employment accordingly, extending the current sequence of job cuts to 55 months. The sharpest reduction in staffing levels was at Renting & Business Activities companies, while Hotels & Restaurants was the only sector to take on extra staff.

Catharsis Ours

Saturday, October 6, 2012

Spain items of note - lead articles from El Pais , other articles to ponder...

Brussels rules out Spanish petition for aid this weekend

Draghi waits at the altar as Rajoy dithers on bailout decision

Bank of Spain says deficit target for this year may be missed

Spain Police Beating Everyone: A Warning To America

Guest Post: Why Spain Is A Riot

Could Spain Breaks Into Separate Countries?

WEDNESDAY, OCTOBER 3, 2012

55 straight months of job cuts in Spain's service sector

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