So the news reports that Rajoy is following the same program of “austerity” as Greece.
The effect that so-called “austerity” measures have had on Greece is well documented and yet Rajoy is following the same playbook.
Given this decision the only logical explanation is that Rajoy wants to produce the same effects in Spain as in Greece.
Let me recap on what has happened in Greece.
Unemployment has increased from 10% to 25%.
GDP has shrunk by over 20% and is still falling.
The Greek government’s deficit has not changed since the start of the austerity. This is a big point so let me expand on it.
In 2008 the government deficit was around 2 billion Euros a month. At the time of writing the government deficit is around 2 billion Euros a month, the big difference being that in 2012 that the economy is 20% smaller than it was in 2008 meaning the government debt is even more unmanageable than it was. Not only have tax increases not helped, they have made the situation worse.
In a word, Greece would have been much better off defaulting in 2008.
And Rajoy in Spain is following the exact same measures as Greece.
To start with Greece increased the rate of VAT and income tax on higher earners. Rajoy has also increased property tax, while in Greece VAT was imposed on property sales.
As happened in Greece, Rajoy is putting the foundations in place to collapse the Spanish economy. If I can speculate why. Rajoy is planning to completely collapse the Spanish economy in order for the solution to be for Spain to give up its sovereignty to the EU.
Things will get so bad in Spain that people will begin to believe that they the only way they can rebuild their economy is through closer integration in Europe.
Let me expand on what Rajoy is doing.
As happened in Greece, it is essential that Rajoy first destroys the private sector. By destroying the private sector first the public sector workers will have no option but to continue working for the Spanish government when Rajoy starts to cut public sector pensions and wages.
If Rajoy were to leave the private sector intact, the effect of public sector wage and pension cuts will not have the desired effect which is implosion.
If the private sector were healthy, public sector workers could simply refuse to accept the pay and pensions cuts, leave their jobs and go and work in the private sector. They will not be allowed to do this. Spain needs to be collapsed to be at the mercy of the Troika.
If public sector workers had the option of leaving and going to the private sector the Spanish economy would start to recover quickly. Let me explain why.
Imagine Rajoy were to announce that public sector worker were to have their wages cut by 40%. I imagine a lot of public sector workers would reject such a pay cut and go and work in the private sector. This would have two effects on the Spanish economy, the effect of the pay cuts would be amplified. Meaning government spending cuts would lead to more savings than simply the cuts themselves due to the reduction of the workforce and all the associated costs that go with it, not to mention the extra revenue the government gets from these people paying taxes rather than the government having to pay them.
Rajoy is obviously not going to let this happen because his first measure has been to sabotage the private economy with income tax increases, VAT increases and property tax increases, just as Papandreou did in Greece and we know what that did to the Greek economy and we know what that is doing to the Greek economy to this day.
I do not believe politicians can be so stupid. Especially when there is a real world example of the effects of such policies in Greece.
Perhaps you could forgive Papandreou as he was the first prime minister to implement such cuts. But Rajoy has the Greek experience to look at so he can perfect his strategy and not make the same mistakes twice.
Given the clear evidence that Rajoy has available, the fact that he is following the exact same measures as Papandreou leaves only one logical conclusion, he wants to achieve the same in Spain as in Greece.
And moving past the tax increases.
Rajoy is also cutting public spending, which is of course is essential. But increasing taxes and reducing spending can only lead to one result, a recession.
And this is not my opinion. It is simply a fact, a rule of nature, a law of physics if you will. A recession is the guaranteed result.
If the government takes more money out of the economy through taxes and puts less money back into the economy through government spending, there is only one result and that is less money in the economy and therefore a recession. And forget about the trade deficit reducing, this is only going to get worse as the tax increases have only made Spain more uncompetitive.
Rajoy policies make it a foregone conclusion that Spain will enter recession and will become dependant on EU bailouts for the forseeable future.
Well you may say Spain has no choice. This is simply not the case.
Spain simply has to cut public spending more. And I am not talking about pensions here. Pensioners have paid in already, it is wrong for them to be the first ones in the firing line.
Spain needs to cut government massively and that means cutting entire departments.
I am Welsh and Spain is probably the most popular tourist destination for Welsh people and yet I have seen nothing from the Spanish tourist board this year. In other words the Spanish governments department of tourism does absolutely nothing and the entire department should be cut.
Other departments that can be cut are the department of education. The regions in Spain also have local education departments, there is no need for there to be a central government department of education.
Department of Energy. The private sector is more than capable of making money from selling something like electricity. There is no reason why there should be a government department for this function. Local governments are more than capable of looking after their needs, it does not need to be a central government function.
The Spanish department for trade/business, whatever it is called. The UK prospered until the 1970s before we had the DTI (Department of Trade and Industry), a modern society is more than capable of functioning without a government department of trade. I am positive that if you speak to a small business owner in Spain they will tell you that they see absolutely no evidence of this government department. In short the department could be closed and nobody would notice.
Spain needs to make massive cuts immediately. Not only to reduce the government deficit but so the government is also able to reduce taxes so the economy can grow and therefore to increase tax revenues through exports. This is accepted knowledge in the USA but not in Europe.
It is extremely easy for Spain to grow out of the current economic crisis.
VAT is 18% there, and is rising to 20%, cutting VAT would immediately make the country 20% more competitive.
By eliminating VAT employees could immediately be paid 20% less and still maintain the same standard of living.
And yes it is just that simple. It can happen but the government needs to cut taxes aggressively and reduce taxes on the private sector.
And to take the VAT elimination a step further. Automatically Spanish labour would become 20% more competitive compared to other countries than it was before. This will lead to manufacturers investing in Spain and that cannot be disputed.
A tourism boom would also follow. The elimination of VAT would make holidays in Spain 20% cheaper overnight.
Not only would the goods be cheaper because of the VAT cut on its own but the price cuts would be amplified because the labour costs associated with the products and service will also be lower.
In short cutting of taxes is a virtuous circle.
A 20% cut in VAT will lead to the prices of products and services dropping by more than 20% because, as I just mentioned, the price of labour will also be less, in reality it could mean the cost of products being 40% cheaper if not more.
And with a 40% drop in the prices of products and services the money that is in Spain will be going 40% further. In other words the money in Spain will be 40% more effective than it is now.
Not only could the government deficit be massively helped by reducing the trade deficit (if not creating a trade surplus) tax revenues will increase because of the money flooding into the country due to the new exporters.
Maybe what I am saying here is revolutionary but I think the benefits of slashing taxes and reducing the cost of living is obvious to everyone who is not an economist, politician or newsreader.
If you can think of extra benefits to cutting taxes and the virtuous circle, please leave your comment below!
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