Austerity measures in Spain pile on the pressure for youth unemployment – AT WHAT POINT DO THEY SNAP?

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Two years after European officials begun claiming that the financial crisis was ending, GDP growth continues to head south in the Southern European regions and France is also stumbling now. More worryingly from a social costs perspective, unemployment levels continues setting record highs in Spain, Italy, Portugal, and in the Eurozone as a whole.

Budget consolidation, correction of long-term imbalances, austerity measures… whatever you want to call it, for the majority of Southern Europeans, the policies implemented have created one of the worst fiascos in recent decades. Europe’s troubled nations have been served with poisoned medicines by their doctor and, looking at the effects of the unemployment rate, will now likely face a long recovery period and with serious social costs. The current austerity measures have had very little effect on the national debts but have, sadly for the millions of individuals who it has affected, had a strong side effect – they have destroyed the jobs market.

Spain’s release last week of its latest unemployment number gave a stark illustration as to just how bad the situation in the country is. The number of joblessness hit 6.2 million in the first quarter, corresponding to an unemployment rate of 27.2%. The number was so bad that it is in fact higher than the IMF’s own numbers for the year. In both Spain and Portugal, the situation on the ground is the worst since those countries became free and established democratic countries, and which is now leading many of their populations to question just how free they really, and more particularly if their Governments are acting beyond their mandates. Political upheaval is likely in the years ahead and with serious ramifications for the sovereign landscape on the European continent in our opinion.

The financial crisis initially hit Spain off guard. At a prosperous time, interest rates remained too low for too long – a direct consequence of inappropriate Euro membership. The ECB was serving primarily Germany’s interests but at the same time, creating equity and property bubbles in countries like Greece, Spain, and Portugal. Banks were seduced by the real estate market and over lent to their borrowers. When the housing market started shrinking, it was too late to save the banks’ portfolios, packed to the gills with impaired credit.

Unemployment started rising from, what now seems a dream like low of 7.95% in July 2007 (it is low by Spanish standards) to 10.44% one year later and to 17.36% in July 2009. With such an increase in unemployment, and with the consequent GDP contraction, Government deficits shot up, leading to the implementation of the serious austerity measures and which have been constantly expanded at the EU’s request. The final result has been catastrophic and resulted directly in the current 27.2% unemployment rate – a measure rarely seen in peace time in a developed country.

If the unemployment rate is high, the youth unemployment rate is, quite simply, off the richter. Currently, out of every 100 youth’s there is 57 people out a job. Think about that. We are surprised there has not been near anarchy on the streets so disturbing is the measure.

Austerity measures implemented in the name of debt consolidation just haven’t worked and in fact have contributed to create a huge gap between countries within the European Union – the sort of environment that sabre rattling far right groups prosper in – we all remember what happened in the 1930’s under such an environment..? If this situation does not change soon, we think the Eurozone, and eventually the Union, as a whole will be destroyed. Even Durao Barroso recently changed his mind concerning the extent of the austerity measures; acknowledging that they aren’t working and that some new expansionary measures aimed at encouraging growth need to be taken – words that annoyed the German Government.

Olli Rehn, EU Economic and Monetary Affairs Commissioner recently said “In Spain, despite significant progress in 2012, there are still excessive macroecomic imbalances.” We are at a loss as to what he means with “significant progress in 2012”. Progress where? Record high unemployment rates and budget deficits and a shrinking economy – we’d like to see no progress…. What is worse than being blind is having sight but no vision.

The stronger austerity advocates cite the current drop in sovereign debt yields as an indication the austerity implemented so far was not only necessary but that i has also worked to calm markets. That’s a wrong interpretation. The current 4.22% yield seen on 10-year Spanish government debt hardly represents reality. The yield is low because of the distorting effects of the ECB’s actions in the market. Aside from the ECB, who would rationally lend to a country with 27% unemployment and no growth at 4.2%. Would you? At some point, the political fires from a dispossessed and embattled European youth will ignite and at that point, European leaders hands will likely be forced – a complete breaking apart of the sorry experiment that has been the Euro.

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