When One Vote is Worth 15 Billion Euros
by Martin Denholm, Senior Editor
Friday, May 28, 2010
Well, it doesn’t get any closer than that.
In an attempt not to get labeled as “the next Greece,” the Spanish parliament just approved a 15-billion euro ($18.4 billion) cost-cutting program.
But it was hardly an overwhelming decision. The Socialist government’s bill passed by just one vote – 169 to 168, with 13 abstentions. (I guess those 13 guys were at the beach or something.)
Spain – one of the infamous European “PIIGS” nations (Portugal, Italy, Ireland and Greece are the others) – is one of several European countries saddled with debt. And not just a little bit either. Like its neighbors, its wayward fiscal ways mean it’s saddled with a budget deficit equivalent to 11% of its national GDP.
As if that weren’t bad enough, the country is coming off an unceremonious popping of its decade-long real estate bubble and the nationwide unemployment rate sits at a mammoth 20%. That’s twice the Eurozone average. So taking money out of the economy now is risky… but absolutely necessary.
True, much of Spain has progressed since the days when it had a dubious reputation among some for having a carefree, “mañana” approach to business and getting things done.
But like its fellow European miscreants, its fiscal irresponsibility has caught up with it.
Just recently, the Bank of Spain had to bail out regional bank, Cajasur. And many fear that it ultimately won’t be the only one, with other banks indulging in the same practices as their American counterparts in getting over-exposed to the real estate market. Reuters reports that banks’ housing-related debts are as much as 300 billion euros.
And the parliamentary vote comes in the wake of a stern warning from the International Monetary Fund that Spain’s economy needs major reform. So will Spain succeed with its austerity plan?
Spain Ushers in a Newer, Tighter Era
Right now, it’s too soon to tell whether Spain has acted quickly enough to prevent its economy spinning into the same abyss that Greece’s has.
Spain’s goal is to reduce its deficit to 6% of GDP by 2011. That would still be twice the (now laughable) mandated Eurozone level, but some countries appear to have just shrugged it off as an arbitrary guideline. Even before the financial crisis and recession hit, several Eurozone nations allowed their deficits to exceed that level.
But the paper-thin margin of victory for Prime Minister Jose Luis Rodriguez Zapatero’s government suggests that the austerity plan is deeply unpopular and gives no wiggle room for error. The package includes deep public spending cuts, a 5% pay cut for civil servants this year and childbirth payments to new parents eliminated.
Another wild ride looms… For tips on how to play the European situation – and specifically, the harm caused to the euro – take a look at Karim Rahemtulla’s article. It shows you how to turn the euro’s decline into low-risk, triple-digit profits.
Best regards,
Martin Denholm
Related Investment U Articles:
- Why You Probably Don’t Want to Hold Euros in 2011
- Alan Greenspan: The Eurozone is Set to Fail
- Haircuts Will Be a Long-Term Problem for the EU
- How to Play the Collapse of the Euro
- European Central Bank Makes EU Summit Irrelevant
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