A blackout in (S)Pain


A crash course for policy makers, economists and bankers of the “brick & low tech”

With over 21% unemployed, 80% of SMEs in bankruptcy, the ECB rate hike to 1.25% pointing another increase in June, labor cost cuts of 20%, red-hot “activity” in rescuing financial institutions and PIGS countries, first signs of social unrest within the jobless youth, etc. urges to do homework.
Comparing Spanish economy with Germany or France, is absurd. Germany sells different products than Spain. If Daimler-Benz exports 10 units of the Mercedes S-Class, means invoicing a million. To export a million worth “Made in Spain”, means selling a lot iberian ham and olives.

The increase of Spain’s exports activity in recent months has been largely due the increased import prices of raw materials and the internal billing “Transfer Prices” to the subsidiaries of multinationals.
To get it clear, see note [¹].

Cutting wages by 20% to be more competitive with Germany or other euro countries, will have little chance, because Spain competes with BRIC countries.
Example:by reducing wages from 10 to 8 € per hour, we achieve nothing, because with the 1.5 € per hour in Brazil, Russia, India and China, Spain can never compete [²].
It only reduces the ability for people to pay their mortgage, leaving them not even being able to have a pint around the corner. Key for survival is the economic, political and social transformation.

And now with higher interest rates, what can one expect?
1. Increases the financial cost to the state: -will pay more interest on its debt.
2. Exacerbates the already high debt: -increases the debt of families, businesses and government institutions. Mortgage owners and SMEs are the big losers.
3. Reduces consumption: -by allocating more money to pay debts (mortgages mainly) lowers consumption.
4. Inhibits investment: -increased financial costs slows business investment activity, more projects are paralyzed or even discarded.
5. Reduces competitiveness: -the strong euro exchange rate makes export activity outside the euro zone awkward.
6. Increases margins of banks: -(intermediation margin – the difference between active and passive types.) but default will also rise.
7. Pays more for savings: -serves only the needs of banks and financial institutions, (due the misery of the global financial system) and suits the big funds and corporations.
8. It aims to control inflation: -for sure in Germany, France. And in Spain?
With a decrease in consumption of 13% in Q4 of 2010, the credit tap tighten for SME’s, by rescuing financial institutions only, we prolong the agony, ladies and gentlemen!

See you soon at the next EU bailout application, (S)pain
Next drama: global debt deflation and rescue of the US.

Notes:
[¹] It’s a tool to show to the authorities “the need” for temporary employment regulation, downsizing staff, obtain governmental subsidies or plant closures in order to justify the concentration of operations outside the PIGS or move production to the BRIC countries. But this crash course is for insiders with an advanced level only.

[²] http://www.creditwritedowns.com/2009/02/do-brics-and-germans-eat-pigs.html

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