Is Spain heading for a bailout?
Figures released today show that Spain's industrial output fell by 5.1% in February on a year-on-year basis -- a bigger drop than the 5% forecast and the biggest fall for three months.
As my fellow Fool writer John Maxfield wrote recently, it's all about the deficit.
Spain's euro membership requires it to run a budget deficit of no greater than 3%. Last year, it missed its 6% target and hit 8.5%.
This year, the European Union has imposed a target of 5.3%, with a 3% target for 2013. Cuts and tax rises of €27bn announced in last week's Budget seem unlikely to be sufficient, so a further €10bn of cuts to health and education were announced by Spanish Prime Minister Mariano Rajoy over the weekend.
These latest cuts may lack credibility, however. They are to be applied by Spain's regional governments, which are notoriously unable to balance their budgets and already have severe financial problems.
Reductio ad absurdum
The current situation in Spain reminds me of a joke about vehicle fuel consumption: "A lower average speed improves fuel consumption, so if I reduce my average speed to 0mph, I won't use any fuel."
Spain can cut public spending until it hits its deficit target, but the resulting economic carnage will plunge the country deeper into recession, reducing its ability to service its debt and balance its budget.
The Spanish economy is already forecast to shrink by 1.7% this year and I suspect this will have to be revised downwards.
Head in sand
Meanwhile, the powers that be in the EU -- Germany and the European Central Bank (ECB) -- seem determined to keep their heads firmly planted in the sand.
Michael Fuchs, an economic-affairs spokesman for Germany's ruling CDU party, yesterday told reporters: "Why should we worry about Spain now? I don't think there's anything that's going to be a difficulty at the moment".
This sentiment was echoed by ECB Council member Ewald Nowotny, who said: "The Spanish government is taking the necessary steps, which will contribute to help calm the markets".
Spain's unemployment rate is currently 23% -- a shocking statistic for a Western European EU member. If ever there was a clear case for Keynesian state-backed investment, this is it.
Spain desperately needs investment that will generate employment opportunities, which in turn would boost tax revenues and stimulate further economic activity.
The sad part of this for Spaniards is that while their country's deficit may be out of control, Spain's government debt as a proportion of GDP is just 67% -- lower than that of all other PIIGS countries, as well as the UK, Germany and France. By current standards, it is quite manageable.
It seems grossly unfair that Spain should be penalised for its deficit when its overall debt is much lower than other EU members.
While it may not seem like a Foolish sentiment, what the Spanish government really needs to do is borrow and spend, preferably while devaluing its debt through inflation and quantitative easing, as is happening here in the UK.
Alas, euro membership prevents such activities, leaving poorer Southern European countries at a considerable disadvantage.
Spain's current EU-imposed trajectory into deep austerity can only make things worse.
The ongoing eurozone crisis could create attractive opportunities for cash-rich investors over the coming months, but the reality for the countries concerned is much grimmer.
As we saw with Greece, something will have to give -- and if Spain can't spend and devalue its currency, it will have probably have to default on some of its debt, or even leave the euro. Austerity alone simply cannot work.
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