The politics of the undelivereable


We may, or may not, be heading towards a political resolution around the latest barrier Europe is attempting to erect for itself but in the meantime the real economy of the most vulnerable nations continue on their downwards slope:

Spain’s housing market continued to weaken in the second quarter, with prices declining 8.3% year-on-year, a government report showed Wednesday.

Compared with the first quarter, Spain’s housing price index fell 2.5%, with the average price per square meter settling in the second quarter at EUR1,606.4($1,967.52), the Public Works ministry said.

The obvious outcome of an overly indebted private sector facing crumbling wealth and a government sector continually raising taxes in an attempt to meet targets that never come is a banking system in serious trouble:

Spanish banks’ bad loans rose to 8.95 percent of their outstanding portfolios in May, the highest level since April 1994, Bank of Spain data showed on Wednesday, up from 8.72 percent a month earlier.

Loans that fell into arrears increased by 3.1 billion euros from April, reaching 155.84 billion euros in May.

Non-performing loans on the books of the country’s crippled banks have risen steadily since a decade-long property boom ended four years ago, with the country now in its second recession since 2009 and one in four Spaniards out of work.

Please see this recent post for more on Spain’s policy trap.

But, as we well know, it isn’t just Spain struggling with economic reality. Since the recent election, Greece has been a bit quiet, but that is changing as the politics of dealing with the undeliverable once again flares up.

PASOK leader, and the former FinMin, Evangelos Venizelos said on radio on Tuesday that the country’s continually degrading economy has made it almost impossible for it to meet €11.5 bn in cuts over the next two years as demanded by the Troika. This situation obviously isn’t new, but it is once again leading to political stalemate:

Prime Minister Antonis Samaras is due to meet on Wednesday morning with the leaders of the other two parties in his coalition government in a bid to finalize the 11.5 billion euros in savings for 2013 and 2014 that Greece’s lenders have demanded.

It seems likely that Samaras, PASOK leader Evangelos Venizelos and Democratic Left chief Fotis Kouvelis will not be in a position to sign off on the cuts as some ministers were less than forthcoming in their willingness to propose areas where savings could be made during talks with Finance Minister Yannis Stournaras over the last two days.

Stournaras held a second day of talks with some ministers on Tuesday but was unable to obtain the commitments to the magnitude of cuts that he needs to put together to come up with the 11.5 billion euros the European Commission, the European Central Bank and the International Monetary Fund — collectively known as the troika — have demanded.

The failure to reach any real commitment has lead to more desperate political action:

Prime Minister Antonis Samaras has issued an ultimatum to his ministers urging them to come up with 11.5 billion euros in savings for 2013 and 2014 in line with the demands of Greece’s foreign lenders.

Should the ministers fail to deliver, the conservative leader warned, the responsibility will pass to the finance ministry and the premier who will decide where the cuts will be made.

The ultimatum also gave ministers one week to compile a list of all properties owned by their respective ministries.

Wednesday’s meeting agenda also included prioritising a list of state own companies and properties to be privatised via the state privatisation fund. In response the deteriorating economic conditions Greece is reported to have asked for yet another loan extension, this time a bridging loan of €3.8bn, to pay for a tranche of bonds due in late August. Unsurprisingly the Troika doesn’t appear to be too happy with the request, but , even if it does eventuate, this loan will simply recycle back out of Greece in order for Europe to repay itself.

Overnight the new Finance Minister, Yiannis Stournaras , announced that there had been some movement on €8bn in savings, although no real detail was available. As you would expect SYRIZA  has been using the renewed tension for its political gain:

Main opposition Radical Left Coalition (SYRIZA) on Monday renewed its attack on the coalition government over privatizations and a raft of further austerity measures that have been announced, stressing that the pre-election promises to renegotiate the terms of bailout loans and avoid cuts to wages, pensions and benefits had been “sordid lies designed to grab the people’s vote”.

Much like the supposed return of Berlusconi in Italy, those statements are obvious political opportunism but that in itself represents a considerable issue.

As I have written previously in reference to Greece, delusional economic theories mixed with a political class who appear unable, or unwilling, to take co-ordindate action has led to a massive loss of political capital across Europe. Europe’s issues were created by Europe as a whole, not by the actions of a single country in isolation, and it will take co-ordinated political and economic effort to address the underlying problems.

Although the early signs of a banking union are positive steps we are yet to see action in the orders of magnitude required to get ahead of the economic crisis. My concern now is that, as I mentioned in regards to Italy on Monday, the weakening periphery economies risk political fracturing and once this has occurred any co-ordinated supra-European policy response will be all that harder to implement.