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Spain’s Disappearing Economy Demands a Bold New Approach

http://www.bloomberg.com/news/2013-02-03/spain-s-disappearing-economy-demands-a-bold-new-approach.html bp spain holdings economy update If you catch yourself feeling a little more optimistic about Europe’s economic prospects now that the cost of government borrowing has eased, take a look at Spain. With an unemployment rate of 26 percent -- about one in three of all jobless people across the euro area -- Spain is entering its fifth year of recession and the pace of contraction is actually accelerating. The country’s austerity-first approach to budget policy is a main reason. Nobody doubts that Spain needs further economic reform, especially in its notoriously dysfunctional labor market. Its fiscal position is unsustainable, too. Spending cuts and tax increases will be needed to balance the books long term. Spain, however, stands as the classic example of self- defeating fiscal stringency: Its efforts to curb deficits too much, too soon have squeezed demand to the point that budget targets have been missed and the economy keeps shrinking. Gross domestic product fell 0.7 percent in the fourth quarter, a bigger drop than the Bank ofSpain and most private forecasters had expected. When comparing fourth quarter over fourth quarter, Spain’s GDP fell 1.8 percent in 2012. Domestic demand dropped more abruptly last year than in 2011, mostly because of repeated rounds of budget cutting. Retail sales were 11 percent lower in December 2012 than the year before. Unemployment, in other words, is headed even higher. Missed Targets Despite increased taxes, spending cuts and public-sector firings, the government keeps missing its deficit targets. The government says it probably did so again last year, when its deficit goal was 6.3 percent of GDP. For now, though, it stands by its promise to the European Union that the deficit will fall to 4.5 percent of GDP in 2013. With the economy shrinking at its present rate, that isn’t going to happen. Last week, Olli Rehn, the EU’s econ

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Spain’s Disappearing Economy Demands a Bold New Approach

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