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The Catalan Bailout

By on 29/08/2012 in Boxed Economics with 1 Comment

As the news spread over the €5bn bailout Catalonia has requested, the question is: how did we get here?

Catalan governmental forces name three factors: the financial turmoil in the euro-area and Spain, the fiscal deficit between Catalonia and Spain, and the financial mess left in the public accounts by the previous left-wing Catalan government.

It is true that the euro-area crisis has not helped Catalan economy. Being part of Spain in the current times of market pressure to peripheral Europe and of reinforcement of geographical imbalance within the euro-area has been damaging.

The fiscal deficit between Catalonia and Spain (the difference of taxes collected in Catalonia and Spanish investment in the region) has been the most blamed reason for the bailout.

Though this deficit is quite true, and amounts to about 8% of regional GDP, it has been proportionally constant in the last decades, both in economic expansion and recession. While its reduction or liquidation could be a structural solution, it can’t be placed as the main reason to the current particular financial problems of the regional government that has led to request the bailout.

It is also true that the previous socialist-led coalition left office with growing public debt and deficit. Furthermore, they did not develop the economic countercyclical measures that they now ask for in opposition. It was a pro-business government that did not save in expansion, lowered taxes and did not tackle the housing bubble or the fiscal fraud.

At the end of their period, last quarter of 2010, Catalan economic conditions were:

GDP: 0.6%. Annual GDP: 1.3%. Unemployment 18%. Domestic demand: 0.2%.

Regional public debt: €34,2bn, 17.3% of GDP. Public deficit: 4.2% of GDP. Debt interests: 3.4% of Gov’s budget.

In this situation CiU, a conservative nationalist party, rose to power, with the aim to reduce public debt and deficit through a severe program of spending cuts.

CiU embraced austerity as the only possible way to solve the crisis. Their argument was: only a reduction of government expenditure will make the deficit fall, will stimulate private demand and investment and guarantee the economic recovery.

In Catalonia, public expenditure is an 18% of total domestic demand. Every ±1% variation of public expenditure, causes a variation of domestic demand by ±0.18% and of GDP by ±0.17%

In the six quarters CiU has been in power, public expenditure has fallen 5.8%. This has directly affected domestic demand (by -1.04%) and GDP (-0.99%).

Furthermore, a negative multiplier effect has contracted private demand, which has fallen 1.1% during the last four quarters.

The contraction of public expenditure and private demand has reduced total domestic demand by -3.4% in the last year.

The sharp contraction of domestic demand has been the main factor that Catalonia reentered recession on the first quarter of 2012, for the second time in the last three years.

It is a double-dip recession, made in “la Generalitat” –the catalan government office-, caused by the austerity policies:

Unemployment has also increased by 4% in the last year and a half. Rise of unemployment, the substitution of taxpayers by benefits recipients, has pressed government budget and caused fallen revenues, entering the “Greek spiral”.

The contraction of revenues has meant that government cuts have not reduced public deficit, which was the theoretical leitmotiv of the austerity plan.

In fact, regional debt has increased by €7.7bn in the last six quarters, placing Catalonia as the largest indebted region inSpain.

Not only public debt has rosen, austerity has not calmed the markets, and bond yields have increased.

Markets only take into account the reduction of public expenditure” –and not any other economic indicator-, has been one of the most repeated fallacies of the austerity ambassadors, who are using the crisis to develop their neoliberal agenda to reduce the public sector and the welfare state.

Furthermore, although the theoretical obsession to cut the deficit, the CiU government has reduced some direct taxes which benefit property holders.

While previous government economic indicators were actually bad, current ones show the erratic economic policy of CiU:

GDP: -0.1%. Annual GDP: -0.5%. Unemployment: 22%. Domestic Demand: -2.9%.

Regional Public debt: €42bn, 21% of GDP. Public deficit: 3.9%. Debt interests: 7.8% of 2012’s budget.

The bailout is no surprise; all macroeconomic indicators have worsened terribly in the last six quarters. The near future doesn’t look much better either:

The bailout conditions imply that Catalonia must keep spending cuts and meet deficit limits for Spanish regions or risk an open intervention. Those are 1.5% of GDP on 2012, 0.7% by 2013 and 0.1% by 2014.

It is quite clear that in a recession scenario, and maintaining austerity policies, those limits will not be accomplished and the Catalan economy could be directly intervened by the end of the current year.

Austerity policies are the main cause of the Catalan bailout. Instead of blaming everyone but themselves, the Catalan government and Mr. Mas-Colell, its chancellor, should recognize their mistakes and urgently change their economic policy.

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  1. unocualquiera says:

    I agree with the reviewer when he says that the austerity policies are wrong, of course, because there are no real austerity policies neither Catalonia nor Spain. They are cutting in welfare spendings, that in part is necessary because the few existent taxpayers can’t maintain this welfare state, but they are not cutting in huge waste spendings like regional media, embassies or ‘Consell Comarcal’. And as the reviewer said, we need to urgently cut unproductive public workers and destinate the small foreigner credit we receive to freelancers and families and move the private economy if we want to rise up from this crisis. CIU, as said, should embrace this message but they are not doing this part of the cuts because they have to maintain their ‘chiringuito’, and they can lie to the local population but no to the ‘damned’ markets, and that’s why the catalonian bond is considered junk bond and yesterday the Catalonia’s bail-out was title page in several international media. The other reason is that Catalonia’s regional government is the unique regional government in the world that doesn’t accept conditions after demanding an bail-out to the central government, this is another prove of how serious is this country, because nobody in this world can imagine California or Baviera not accepting conditions from their respective central governments after requesting such demand.
    In fact, the international institutions have already realized the ‘institution inadequacy’ implanted in Spain, another prove of this was the official statement made by the European Comission related to this bail-out, so we can’t expect an kind economic treatment from the outside. Don’t forget that this is a problem we earned by ourselves, so forget the local politic thought that easily blame other institutions like Germany, EU or ECB.

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