Now It's Spain's Turn
By Staff News & Analysis - April 07, 2010

Songbird Peggy Lee never offered herself as an economic forecaster, but her famous 1947 hit song, "Mañana," included such prophetic lines as "My pocket needs some money; once I had some money; my brother isn't working" – all to be attended to mañana. Which seems to be the theme song of Spain's socialist president, Jose Luis Rodríguez Zapatero. His nation's economy continues to decline: Spain has been in recession for seven quarters; its unemployment rate, at close to 20%, is twice that of the euro zone; its budget deficit is 11.4% of GDP; Moody's ranks Spain at the top of its "misery index," the total of the unemployment rate and the deficit. The central bank expects growth next year to be an anemic 0.8% and sees no significant drop in the unemployment rate this year or next. Standard & Poor's has already lowered Spain's credit rating and its outlook on the country's sovereign debt from "stable" to "negative." To which Mr. Zapatero has been responding with attacks on the Anglo-Saxon media and "the neoconservative model based on capitalism" … Now, to the real world: one in which investors have made it clear that they know that the so-called Greek bailout trumpeted by euro-zone officials is no such thing so that Greece is paying twice as much (about 3.5 percentage points more) to borrow as solid Germany does. – Wall Street Journal

Dominant Social Theme: The problems that need to be confronted.

Free-Market Analysis: It is nice to see that the mainstream media has woken up to one of the biggest stories of the 21st century, the foundering of the European Union – the grand socialist experiment that began as a modest trade union and has ended in an attempt to squash together dozens of differing European countries with tens of thousands of years of unique history between them into one "American-style" international stew.

Just because it is taking a while does not mean it's not happening. It is. We predicted years ago that the EU would have a good deal of difficulty maintaining its integrity. We predicted months ago that the gradually unwinding of Greece, Spain, etc. – the Southern half of Europe – would continue apace and that EU leaders would have a great deal of difficulty in deciding how to handle the current debt crisis.

When times are good in a fiat money environment – when the paper money being pumped out by mercantilist central banks is seen as valuable and even accruing in value – it is fairly easy to involve individuals, businesses and governments in a variety of schemes. When paper money fails, as it eventually always does – even if only for a period of a few years – it is difficult to retain the integrity of these coalitions, which are merely, and mainly, bought and paid for.

The EU was too ambitious by far. It used its paper-money facility to build an empire, but now the empire is cracking up. EU leaders anticipated this of course, and assumed that the bureaucratic heft of the institution itself would eventually guarantee a solution. But it doesn't look to be happening that way. Instead of coalescing, the EU faces fractionalization. We would of course blame the Internet, which has spread the reality of the EU far and wide.

It is true that many within the EU have gotten a taste of what it is really all about by now. And the difficulty that the EU ran into trying to impose a constitution should have been a warning. But the elites running the EU are perhaps blinded by the glory of their destination. Certainly for them it is indeed glorious in a sense. The EU is basically an authoritarian institution, intended in our view to be a stepping stone to a world government run by a intra-generational power elite. The idea is to build currency blocks, one in Europe, one in the Americas, one in Asia and eventually, one Africa. The socialist rhetoric that has accompanied the convergence of Europe is just that – an overlay concealing the truth of the EU project. It is actually a brutal power play of the powers-that-be not a gentle convergence of communitarian impulses.

How did it happen? Those in charge of the project – the ambitious men and women pushing it forward – basically bribed half of Europe to join. Now the bribes have unraveled, exposing Europe's dark and debt-ridden underbelly. It was a simple enough process, by the way, when you get past all the talk. The EU had certain parameters necessary to the stability of the euro, which was to be a strong currency, stronger even than the dollar because the debt of the countries using it – relative to their GDP – was to remain healthily low.

But as might be expected, the Southern part of Europe – especially – "gamed" the system (with the EU's knowing wink) by inflating assets and fiddling with debt numbers. Not only that, but these weaker countries actually received payments from the EU that were intended to go toward making their governmental bottom lines stronger. The payments did not do anything to balance budgets however. In Spain, Greece, Italy, etc. it must be presumed that the largesse that flowed in was distributed to a core of EU-supportive leaders and their hangers-on. Corporate leaders got some of the loot as did unions, the public sector and others who were presumed to be in the vanguard of forward-looking EU citizens.

Thus it was a kind of double bribe. First, weaker nations secured themselves a stronger currency via sleight-of-hand. Second, those who participated in the farce received cold cash that they used for personal purposes rather than for the greater good of the state. And really, why would anyone expect anything else? Europe is only 60 years removed from a terrible global war that saw literally millions slaughtered. This horror is only a few generations back. To believe in Europe's recent veneer of contentment is to be as foolish as those who distributed money to Southern Europe expecting the funds would go to "pay down debt." No, we know what Europe is – these descendents of Vikings and Roman marauders. We have long characterized these tribes as something other than the peaceable, union-loving citizens they have been made out to be in the past decade at least.

According to the elite's dominant social themes, the people of the EU "community" understand that they are part of a larger communal entity that seeks world peace, a greener future and generally wishes to reduce its aspirations while elevating social consciousness. In reality, as we have written, the tribes of the EU are likely as parochial as they ever were. These were the cultures, many of them, that harried the Roman Empire into its fall. And if they did not oppose that resolute empire they supported it. The idea that the European institutional memory only goes back as far as World War II always seemed suspect to us. The Spanish Basques claim to have lived on the same patch of soil for 20,000 years. Now that's a narrative. Good luck substituting a new one.

From our perspective, the Southern half of Europe is not likely to generate the discipline necessary to continue without considerable aid. Europe itself has not been able to come to a conclusion about how to help Greece let alone the other countries that are currently unwinding. Greece just requested a further sweetener; Germany yesterday demanded that Greece pay higher rates for EU cash. Europe's central bank has indicated that it will buy Greek paper, as we understand it, but can this policy be continually pursued as Spain, Portugal and other countries face their own crises? (And there is France as well in our estimation – though the market has not focused on France yet for a variety of reasons.) An IMF bailout also raises questions. Let the IMF arrange the affairs of two or three EU countries, if it can, and the EU will have lost effective monetary control it seems to us.

After Thoughts

There may be a way out that we don't visualize currently. But the statements of the current Spanish government don't seem to augur well for the larger EU effort. Like Greece, the Spanish don't appear inclined to be apologetic and the ideas that the EU leadership had of an evolution of EU political leadership are increasingly unrealistic. We are not in a position to predict the unwinding of the EU – having no crystal ball – but even months into the latest crisis we still don't see a satisfactory outcome. The tribes of Europe are behaving about as we expected.