On January 30, 25 of 27 nations signed the Merkozy accord calling for strict budget discipline and “quasi-automatic sanctions” for nations that violate budget rules. Only the UK and Czech Republic refused to sign.
Following that ceremonious signing it took precisely two days for European bureaucrats to propose “Application of the rules in a strict manner in the face of a downturn doesn’t make sense“.
Spain Poses Six-Pack Rules Challenge
Please laugh along with Spain poses six-pack rules challenge
Spain’s deteriorating economy poses the first challenge to Brussels’ commitment to enforce tough new budget rules intended to repair credibility with financial markets and ease the debt crisis.
“Application of the rules in a strict manner in the face of a downturn doesn’t make sense,” said Andre Sapir, a senior fellow at Bruegel, a Brussels think-tank. “One has to find a compromise.”
Olli Rehn, the economics commissioner, threatened to “fully use this powerful set of new tools from day one”.
But the EU’s executive arm is also sympathetic to Spain’s plight. Following a meeting in Brussels on Monday with Mariano Rajoy, the Spanish prime minister, José Manuel Barroso, the European Commission president, suggested that a debate was now under way on whether to make some accommodation for Madrid.
“Efforts should be made to contain the deficits for 2012,” Mr Barroso told reporters. “However, it would be convenient now to have a discussion … about this situation.”
It also risks drawing the ire of fellow member states, which have already been exposed to tough consequences because of the six pack.
Belgium, for example, earlier this month cut more than €1bn from this year’s budget in a frantic weekend exercise in order to avoid fines – an experience that led a top minister to lash out at Mr Rehn. Meanwhile, Hungary was threatened last week with a freeze on its EU development funds for next year if it does not comply with the rules.
But such considerations may be overwhelmed by the severity of Spain’s situation. Even local business leaders who favour harsh curbs on public spending now say that sticking to the original 2012 deficit target of 4.4 per cent of gross domestic product is almost impossible and risks plunging the economy into depression.
Precise Targets Go Out the Window Already
Mr Rajoy’s ministers have recently been careful not to reaffirm their commitment to the precise 2012 deficit target of 4.4 per cent of GDP – although they reiterate their austerity pledges in general terms – and are evidently hoping that the Commission and Angela Merkel, the German chancellor, will accept the need for softer targets provided Spain launches its promised economic reforms.
“Once Merkel has the certainty that these [southern European] countries are doing the right thing, the stance of Europe may be relaxed,” says the banker. The head of another leading Spanish business said: “The important thing is that the path to a lower deficit should be credible and coherent.”
It should not take too long for Portugal and Ireland to find it “convenient” to also request a variance in the “Application of the rules in a strict manner“.
Spain Kicks Off the Year Destroying 9,000+ Jobs a Day
Courtesy of Google Translate from El Pais, please consider The economy started the year destroying more than 9,000 jobs a day
As reported to the Ministry of Employment, Social Security membership fell by 283,700 people in January, about 9,000 jobs a day. The average number of employed fell below 17 million (16,946,237) for the first time since the beginning in 2005.
Courtesy of Google Translate from Libre Mercado, please consider Employment has Worst Start Since Fateful Year of 2009
Spain Social Security Membership
[Mish comment: Judging from the January numbers (all negative), the data is not seasonally adjusted.]
The total number of employed fell below 17 million (16,946,237) for the first time since 2004.
Very negative balance
According to the Foundation for Applied Economic Research (FEDEA), “after four years of crisis, employment continues to be destroyed, and what is worse, the intensity of this destruction increases.”
Meanwhile, according to the Association of Large Temporary Work (Agettes), the January data show that “we continue down the wrong path. We are witnessing a dramatic scene again that, unfortunately, is unknown to us because we have four years assisting new negative record. The global economic situation continues to drown our perspective, while our own labor market tightens further the bit oxygen that remains.”
Spain Unveils EUR 50bn Bank Sector Clean-Up
EU Business reports Spain Unveils EUR 50bn Bank Sector Clean-Up
Spain’s government unveiled reforms Thursday that will oblige banks to clean up their bad loans by building up provisions and capital reserves totalling 50 billion euros ($65 billion).
The banking sector is weighed down by a mountain of soured loans and property assets that are losing their value after the collapse of the Spanish property market in 2008.
According to the Bank of Spain, the sector had 176 billion euros in problem loans and seized real estate in June 2011 — a figure which has probably increased since, as the economy has weakened.
The sector has undergone a major restructuring since 2008 but the government considers it still to be at risk despite banks putting aside a third of this amount to cushion the blow when they sell off the bad assets.
The new reform aims to “generate mergers to form viable entities” out of struggling ones so that “the clean-up will be quick and deep”, De Guindos said.
There was 176 billion euros in problem loans last summer. What is total now, 250 billion?
Banks are somehow supposed to come up with $50 billion in capital (when? how?) after which they merge struggling banks and via some undisclosed magic process “the clean-up will be quick and deep” forming viable banks.
This is an easy call, especially in light of employment trends: That plan is doomed and Spain is in deep trouble.
Mike “Mish” Shedlock
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