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Thursday, February 07, 2013 11:45 AM


Non-News of the Day: "Draghi Says Risks to Downside"; Investigating the Non-Nascent Recovery in Spain; Two Things Spain Needs (and Won't Get)


Today's non-news that has the currency markets in a flux with a rising dollar and a sinking euro is a revelation by ECB president Mario Draghi that Eurozone Growth Risks are on the "Downside".

Really? Downside?

Yes, really. It would have been shocking to hear otherwise in spite of all the happy fluff talk that the "worst is behind".

Before Draghi spoke I wrote about Illusions of Stabilization, with a spotlight on France and Germany. Please check it out.

Let's now dig deeper into the non-nascent recovery in Spain.

Spain's Public Debt Doubles to €1 Trillion Since 2007; Debt-to-GDP Ratio Hits 96.2%

According to El Confidencial, Spain's public debt crossed the €1 Trillion marker for the first time.

Public debt is now $1,015 trillion euros and growing at a rate of €100 billion euros a year. Public debt stood at €503.906 billion in 2007.

Recall that the eurozone Stability and Growth Pact places a limit on government deficit at (3% of GDP) and debt (60% of GDP).

Spain's Unemployment Rate



Spain's seasonally adjusted unemployment rate is 26.6% according to Eurostat data as mapped by Google. The BBC reports Youth unemployment is a record 55%.

Deficit Targets Missed Again and Again

Spain was supposed to reduce its deficit to 6.3% by the end of 2012. That number had to be raised twice.

On October 1, 2012 EU Economic and Monetary Affairs Commissioner Olli Rehn said Spain's 2012 deficit target achievable. I laughed out loud when I read that.

The official results are still not in, but expectations are now in the range of 8%. On the over-under line, I will guess higher.

Spain's deficit targets were 4.5% for 2013 and 2.8% in 2014. Odds of success are zero.

Not to worry, Brussels extended the deadline and reduced the targets once again. We are now looking at 2015 or 2016 for compliance.

At last count, Brussels now expects for 6.1% in 2013. I expect that target will be revised up. It won't matter. Spain will still need more time.

Two Things Spain Needs (and Won't Get)

Spain cannot recover until it sheds the shackles of the euro and defaults, or Germany and Northern Europe forgive hundreds of billions of Spain's euro denominated debt.

Bear in mind neither of those is sufficient. In addition, Spain needs many structural reforms related to work rules, unions, and pensions in addition to one of the above choices.

Since none of this is likely in the short-term, Spain will continue to sink. And France with Hollande at the helm is like "going to hell in a handbasket". Simply put, the French economy won't thrive, to say the least. And Germany can hardly rebalance on its own.

So ignore all this happy talk about the worst being behind. It's all an illusion based on stabilization of bond rates in Europe, and that won't last either.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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