German fun vs. Spain´s pain

The debt markets are focusing on Spain again, and the debate between fiscal conservatives and stimulus proponents rages once more. Paul Krugman has just published another post showing that before the real estate bust Spain´s public debt was much lower than Germany´s. He compares net flows in 2010 and 2007 to state his case. This is not a reliable method to compare leverage levels. So here are the most recent balance sheet values as published by the OECD.

It is true that with an economic size of less than half the size of Germany (43%), Spain´s government debt was just one fifth of Germany´s public debt. However, the Spanish economy as whole had a net debt equivalent to almost 80% of GDP, while Germany was a net creditor, and between 2007 and 2010 increased its creditor position from 6% to 21% of GDP.

In what concerns the shares of public consumption in total GDP we can see from the following table that the share in Spain is only marginally higher than in Germany.

The fundamental difference between the two countries is that Spanish companies borrowed more than German firms while Spanish households saved very little when compared with those in Germany.

Moreover, some of the borrowing was financed by Germany and was mostly invested in loss-making real estate. Indeed, the robust public finances in pre-crisis Spain were the result of paper profits generated during the real estate bubble (in a fashion not much different from the Clinton surplus during the internet bubble).

So, the Spanish problem is a banking problem and should not be transformed into a long term fiscal problem, like in Ireland, which will compromise its future growth.

True Democracy ≡ Representative Democracy

Los indignados (the indignant) sit-in by young people in central Madrid and other European capitals is not just one more “youth protest”. The true grievance expressed by many protesters is not simply an adulthood ritual.

Every generation of teens and youngsters needs to affirm their adulthood by contesting their parents. This is usually done by adopting different life styles, entertainments and clothing or by endorsing naive political views. This is a positive process promoting creativity and carried out mostly in peaceful ways (despite the occasional brawl by a few thrilled by violence).

However, the indignant complaints have more to do with failed job expectations and unemployment and what they see as the lack of hope. They feel betrayed by elected politicians who pay only lip service to their concerns. Traditionally left wing parties and anarchists capitalize on this discontent to recruit members and cause some havoc. Ironically this has been a key reason why many youngsters have kept away from such protesters.

Although on the background those parties still try to manipulate the protesters, in general, these have been led by genuine non-partisan leaders. So why are the protesters still embracing revolutionary utopia falsehoods and anti-capitalist propaganda?

Some in the Democracy Camp in Madrid’s Puerta del Sol demand a “Real Democracy Now through neighborhood assemblies”. This amounts to direct democracy, which throughout history has always failed to provide democracy and led to dictatorships. This idea of direct rule by the people is populism based on a false view of early forms of democracy in ancient Greece. Rule by the majority, subject to a constitutional limitation of power to protect minorities, is the true democracy. And that is representative democracy.

Still, youngsters are right in questioning why elected representatives fail to act on their concerns. They need a clear answer to: a) they do not care; b) there is nothing they can do about it; c) the problems are transitory and the labor market will recover soon; or d) that the measures they are taking will work but take some time.

First they need to dispel the first perception. Second they need to fight the main source of anxiety – uncertainty.

This means that classical liberal progressive politicians cannot entrust the young generation to some kind of anger therapy provided by left wing revolutionaries and hope that anxiety dies out soon. For a young person who has been unemployed for more than two years it is not enough to hear that the market will solve the problem some day.

They need hope, and need it now. So, whether politicians believe in demand or supply measures they need to demonstrate action now.

Such action must also include education on why representative democracy together with constitutional liberalism and market capitalism are not the cause but the solution to their problems. They are in fact the only solution that can give young people hope in the future.