Leaders: Pain in Spain will spread if austerity doesn’t ease

Spain’s economic pain is getting so bad as to be intolerable.

Unemployment has now risen to nearly 25 per cent (and unemployment amongst the young has edged above 50 per cent), the country is getting close to the point where pain becomes torture and the economy cannot get out of the hole it is in. That is not just Spain’s problem – it is Europe’s problem and, because so much of British trade depends on a functioning Europe, a British problem, too.

The conclusion that austerity is part of the problem rather than the solution now seems rather obvious. The Spanish government has done pretty much all that has been asked of it by eurozone leaders in cutting public spending to more closely match public revenues. But these revenues are not rising. Driven by shrinking employment and consumer demand, they are falling.

This in turn puts more pressure on Spanish government bonds, meaning that more tax revenues have to be spent on financing debt rather than providing public services. Worse, Spanish government debt is still rising, up from 65 per cent of GDP a year ago to 72 per cent now, with no sign of a peak being reached.

All this, coupled with similar problems in Italy and Portugal, is increasing the strain on the euro. Much store is being put on a meeting of the European Central Bank [ECB] next Thursday. The bank’s governor, Mario Draghi, has raised expectations that dramatic action will be announced with his recent statement that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

That action could encompass a number of things, such as buying Spanish and Italian debt in order to keep the cost of it down. But these actions, as far as Spain is concerned, are treating the symptoms rather than the underlying cause of the problem, which is a lack of growth.

Even mighty Germany, according to the latest indicators, is slowing down. The greater the slowdown, the harder it becomes to reverse it. And such a turnaround cannot be engineered by banks alone, it needs political 
action.

Thus eurozone leaders need to be thinking about what they can do and, as ever, eyes will become focused on Germany’s chancellor Angela Merkel. Circumstances now might well open the way for her to sell to her suspicious voters the idea that they have to dig a little deeper, not just to save the euro, but to rescue the European economy.

Much of the reason that the German economy is stalling is because of lack of demand. Fewer people are buying German products because they cannot afford them. It is thus in Germany’s interest that it participates in European measures designed to stimulate demand, whether by tax cuts or spending increases. Otherwise the pain in Spain will become all the more excruciating and the rest of Europe will feel it, too.

Renewables cost raising concerns

Scottish and Southern Energy’s decision to, in effect, cancel three small hydro-electricity schemes with a planned output of a mere 21 megawatts may seem like small and unremarkable beer. But because the decision was caused by a reduction in the subsidy available for output for new hydro, it is a symptom of a much bigger issue: political concern about the cost to the consumer of renewable power

The move by SSE follows the announcement by the UK government that it was cutting the amounts hydro generators can earn through Renewable Obligation Certificates. Other generators planning small-scale hydro schemes, such as RWE nPower, are said to be thinking of following suit.

In the same announcement, there was a 10 per cent reduction in the subsidy to onshore wind, which generators, while

unhappy, seemed to accept.

These differing outcomes demonstrate that finding the right subsidy level, which promotes renewable development but does not penalise the electricity consumer, is a delicate matter. UK ministers, aware that high energy costs are one of the things hampering economic recovery seem to be now placing much more weight on the consumer side of the equation.

The Scottish Government must now consider this issue. It places a great deal of store on “reindustrialising” Scotland through expansion of renewable energy. But especially in the context of independence – where it seems unlikely consumers south of the Border will be willing to subsidise firms operating in a foreign country – poses the question of how much of the cost the Scottish consumer is willing to bear.