Spaniards are understandably fed up with 45% youth unemployment and 20% general unemployment. They have recently directed their anger at socialists in local government. The causes of their misery are the level of the Euro, the EU austerity programme, their over borrowed state and above all their weak banks. These things are the result of past Spnaish governments signing up to the EU and Euro project. Now they are locked in it is difficult to do much about their problem.
The EU thinks higher taxes are part of the answer. They are part of the problem. The EU thinks the banks need to be buttressed with more cash and capital. That is true in the longer term, but when you want an economic recovery it is not a good moment to become more defensive about bank balance sheets. Nor should they believe the bad debts and other issues in the banks will simply go away. They do need to tackle those, so the banks that remain after asset sales, write downs, capital reconstructions and the like have better assets and are in a stronger psychological position to lend more money sensibly.
There is nothing the Spanish state can do about the high valuation of the Euro. As a result, in order to compete and sell more abroad they have to either work smarter or accept lower pay. US and UK workers have had their effective wages cut by devaluation in recent years. Spanish workers have to agree to cut their wages directly, or agree higher productivity working with their managers.
The state does have to get closer to living within its means by showing it too can bring its spending into line with its income. This also requires productivity boosting measures, or a tougher approach to state employee pay.
So what can power growth when all these adjustments are going on? For growth is needed to help create the jobs. If they take the sensible actions of adjustment the economy can start to export more. It will need more capacity to export, so private sector investment will also rise. If they mend the banks or create some new ones there will be more credit available for suitable projects and businesses. Over time, as jobs are created, private sector consumption can then start to rise as more people have work incomes to spend.
It will not be easy, but that is the only approach. Playing around with more state and bank debts without sorting out the underlying imbalances will not work.
Today PArliament has an opportunity to vote against any further UK involvement in Euro bail outs. We do so just as the EU markets are once again puttingpressure on Greek, Irish and Portuguese debt, and just after a debt rating warning for Italy.