Does Anyone Else See The Ultimate Irony In Spain?

Olli Rehn

Photo: Bloomberg

From the FT:The EU’s top economic official said on Wednesday he was ready to consider extending Spain’s deadline to hit tough deficit targets by a year, the clearest sign the EU is concerned austerity measures it is enforcing in eurozone countries may be deepening the region’s recession.

Olli Rehn said he would only allow the leniency – which would give Madrid until 2014 to reduce its budget deficit to 3 per cent of economic output – if the Spanish government proved it could rein in profligate regional authorities and presented a credible budget plan for the next two years.

Two points here

The first is minor: Fiscal sovereignty is already dead. Now it’s just a matter of ratifying it.

The second is bigger: Spain is in a full-on sovereign debt ciris, and people think that a possible relief valve might be found in giving Spain more leniency on deficits.

It sounds perfect, but it’s not. Austerity has made everything worse in the PIIGS, and by everything we mean debt and deficits. Thus if austerity makes your deficit situation worse, there is some ironic logic in ameliorating the crisis by getting less aggressive on deficit targets.

Back in April, the FT’s Wolfgang Munchau said something incredibly perspective: Markets are flipping out not because austerity is expected to fail, but because it’s working and destroying the economy.

News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism.

The latest comments from Olli Rehn vindicate Munchau. Austerity is the problem and the way to cool things down is to take the foot off the gas pedal.

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