Friday, May 11, 2012

Spain. The Next Greece?

Spain's private debt is now at 200% of GDP.  Unlike Greece, the country's structural deficit is anticipated to be around 3% of GDP, providing some short term flexibility to the government.  The way to think of this problem is to do so in two parts.  In the long term, high levels of public spending will reduce private sector growth, lower creditworthiness, and increase the cost of funding the public account. In the short term, cuts in public spending attenuates the multiplier from consumption, increases the burden on social welfare (at least in Europe), which further depresses growth.  The trick is to re-inflate short term growth without the cost becoming a drag on the long term creditworthiness of the public account.  This means moving, in the short term, more private wealth to the public, but with an unbreachable agreement of a 'payback' when Europe gets over the economic hump. Whether this can be done in the political climate (re: elections in France and Greece), is not certain.

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