Mariano Rajoy And The Spanish Depression

“We must all ask ourselves whether the ECB should have the same powers as the rest of central banks in the world. We need to give ourselves the instruments that are available in other regions.”

--Spanish PM Mariano Rajoy, Bloomberg, April 8, 2013

Spain is in a full-blown depression, which began five years ago. The economy is shrinking in real and nominal terms. Prices are falling in a Japanese fashion. M2 is the same today as it was in 2009. Even though government spending is falling, the fiscal deficit remains at an unsustainable 10% of GDP because government revenues are falling as fast as spending. Debt to GDP is headed for 100% in 2014. One out of four Spaniards is looking for work. Half of all young people cannot find jobs. The insolvent banking sector is being propped up with cosmetic accounting and ECB liquidity. Credit to the private sector has dried up, which bodes ill for employment. The public sector is shrinking and the regions are bankrupt. Spain today is the US in 1932, with Mariano Rajoy playing the role of Herbert Hoover.

To his great credit, the prime minister has put his finger on the problem: the fact that Spain’s central bank does not have a growth mandate and--even worse--doesn’t want one. You can’t fix the problem until you have identified it, and Rajoy has identified the problem. What’s he going to do about it? Nothing, it would appear.