Recent news indicates that the Eurozone will keep a functioning banking system, hardly surprising in light of the alternative. What a new fiscal treaty will do for economic recovery is far less certain. Leaders have demonstrated a commitment, but the size of this commitment remains unknown. This is business as usual in the politics of money. Still, this measure only addresses one aspect of crisis, fiscally irresponsible governments.
No one should have been surprised that final resolution of Greece's problems will be delayed, or that the Spanish government will fall short on deficit reduction. Perhaps, a raised eyebrow is warranted that the Netherlands, long a model of financial prudence, will also fall short.
Spain's government is different from Greece and Portugal in having run a balanced budget during most of the run up to the crash. Spain's private citizens were far less cautious. Real estate speculation inflated wages as well as prices, and Spanish labor priced itself out of competition. Those left holding the bag for mortgages were often those with safe jobs who thought the boom could go on forever.
Now, we see a reckoning; unemployment is reported by several measures to be around 23%. This is well into the danger zone, and perhaps still rising. More troubling is the effect on young workers, 49% of whom are unemployed. People who have jobs are hanging onto them at all costs. Even willingness to work for less is not enough to allow new workers into steady employment. Lack of experienced young labor will bite Spain at a later date. In the meantime this is a social powder keg. On the other hand, the overhang from overpriced mortgages means that simply cutting back on wages will result in a new wave of mortgage defaults, likely followed by bank failures.
We have to ask how Spanish workers and homeowners became responsible for major economic misjudgments by financial institutions. By and large, surviving institutions appear to have guarantees of protection from consequences of misjudgment. This is even true of those which issued the collateralized debt obligations (CDO) and created credit default swaps (CDS) which eliminated natural concern for making bad loans. The percentage of homeowners and workers who understand these instruments is negligible. Who then is responsible?
Until this aspect of the ongoing debacle is addressed many investors will remain on the sidelines. Governments under tight fiscal constraints will not make up the difference.
Eurozone fiscal compact
Blog entry posted by anciendaze, Mar 2, 2012.