OREANDA-NEWS. April 12, 2011. The world’s financial crisis was an expensive lesson for all the world’s economies – both to the leading economies and to the “non-leading” ones, as well as to everyone else. Moreover, the price they had to pay for the crisis turned out to be very different for the former than for the latter, reported the press-centre of Rietumu.

If Germany and France have independently managed to sustain the process of surviving the crisis and its consequences (if necessary, they are ready to master additional market tools to achieve this), and are still managing this and will mostly likely continue to do so in the future, then where Spain is concerned surely the same cannot be said. Furthermore, a widespread opinion is being formed that in the near future Spain will find itself in need of significant international financial help (some analysts draw really apocalyptic scenarios for the consequences of such measures, both for the euro specifically and the European Union in general).

The current minor investigation is an attempt to realise whether the country of Don Quixote really does face financial apocalypse and, if it does, then we need to understand what the reasons for this were and how Spain managed to go quite so far down the road to ruin. Spain is selected by us as one of the best well-bred “pigs” - the abbreviation PIGS is made up of the names of four member countries of the Euro zone: Portugal, Italy, Greece, and Spain – which faced the most serious problems during the period of the current crisis; in this respect the Spanish economy is equal to the size of the German and French economies.

How It All Started
It is the year 2002. Freshly printed euro banknotes make a softly crisp sound in the hand, the coins are pleasant to the eye without losing their beauty and brilliance. Statistical authorities are heroes in their countries (who are mentioned in our investigation) summarise the results for 2001.

And so onto the populations of these countries: Germany, 82.3 million; France, 60.9 million; and Spain, 40.5 million. The gross domestic product per capita of the population is at 23.09 thousand euros (for Germany), 24.09 thousand euros (for France), and 19.52 thousand euros (for Spain). The structure of the GDP for all three countries is also similar: the basic proportion is attributable to services, the industry share makes up between 26.8% in Germany up to 19.2% in France, while the share of agriculture is small (from 0.9% to 2.9%). Germany and France have a more developed banking system compared to Spain (assets per capita make up 76.62 thousand euros in Germany, and 66.46 thousand euros in France against 32.92 thousand euros in Spain).

The atmosphere is cheerful. the Germans are preparing for the Olympic Games in Salt Lake City (where they will take second place overall amongst the national teams taking part) and do not yet know about the expected flooding in August being the most severe for the last century. The French and Spanish simply enjoy their lives.

Excessive Growth
There is an opinion (and overall the author agrees with it) that excessively high growth in GDP may lead to serious abnormalities in the economy and provoke a significant range of problems during any stabilisation or fall (we have to note that no one has cancelled the cyclical development tendency inherent in economies).

So let us take a look: the GDP in France in the period 2001-2010 grew by 8.9% (in comparative prices) by keeping stable per capita of the population. Germany “added” 25.02% on the growth of the per capita ratio, making it 25.72%. But the economy of Spain grew by up to 44.06% (per capita plus 26.8%).

The figures mentioned here may be interpreted as follows: during the first decade of the twentieth century the French economy developed slowly and in almost a fully extensive manner, the economy of Germany developed at a moderate speed and fully intensively, while the economy of Spain developed at a tempo above the average for developed economies and in a mixed format.

Banking “Bubble”?
The experience of those countries which were left behind in the framework of the given analysis (the USA, Iceland, and Ireland) clearly show that the excessive passion of the banks in various hybrid instruments (derivatives), when they are too large and non-proportional for the economic banking system, can also result in a range of exposures.

During the period from 2000 to 2010, the current assets of the German banking system grew by 36.51 %. In France the rate was 109.55%, and in Spain it was 197.60%. Besides this, the GDP growth in Germany for the current prices corresponds to the growth of assets in the banking system, while in France the banking system overcame the growth of the economy by 3.4 times, but in Spain this figure was 3.6 times.

Of course, these figures may have been significantly influenced by the statistics of different mergers and take-overs in the banking sphere (which is left out of the framework of this analysis), but even so it is obvious that the banking system in Germany developed proportionally, while the French and most especially the Spanish banking system did not, so the “bubble” really exists.

Maybe Somebody “Ate Too Much”?
It is well known that excessive growth of consumption over a lasting period is something that is subject to the accrued deficit of the trade balance, which may or may not be compensated for at the expense of current expenditures, external revenues and external investments. The second variant sooner or later leads to a forced internal or external devaluation of a country’s national currency. But neither Germany or France, or Spain naturally, have the option of carrying out an independent external devaluation of the euro.

The path of internal devaluation (involving a considerable reduction of internal expenditure) is always extremely painful in view of the social consequences it leads to, as it is inescapably connected with a different method of cuts and reductions (involving governmental administration staff and salaries, a lowering of wages, increasing the pensionable age, etc).

In the period which is the subject of this overview, Germany accrued a surplus trade balance to the amount of 101.69 billion euros. An analogous ratio was experienced in France, where the deficit amounted to 38.3 billion euros. But Spain looks very sad by comparison, because in the period from 2003 to 2009 the accrued trade balance deficit for this country made up more than 450 billion euros. In addition, there is still a tendency for the deficit to experience growth. Meanwhile, if Germany is an investor itself, but France is able to cover, at least so far, the trade balance deficit at the expense of the balance of current expenditures and external revenues and expenses, then the deficit in the Spanish trade balance is covered solely by the positive balance of external investments.

Maybe the Demographic Situation is at Fault?
The population of Germany over the first decade of the twenty-first century remained generally stable (minus 0.44%), the population’s natural growth was compensated by the influx of immigrants, as a result of which the average age of the population grew considerably. The population of France during the same period grew by 6.12% (by a third, at the expense of natural growth, while the remaining amount was due to immigration), and the average age has also increased, but not so strongly as in Germany. The growth of the Spanish population reached 14.8% by keeping the same age structure in general.

To summarise the aforementioned, a conclusion may be drawn that the demographic situation is not one of the significant problems for Spain, but for France and especially in Germany it is confirming a substantial consequential risk in connection with the demographic situation in these countries.

Conclusions and Forecasts (in the Form of a Small Author’s Interview)
Question: Does Spain really face serious problems in its economy, which are mainly caused by excessive consumption, a non-proportionally large banking sector and an increased tempo of growth in the last decade?

Answer: It certainly does.

Question: Is it necessary for Spain to introduce internal devaluation?

Answer: Yes, it is necessary.

Question: Will it be carried out and, if yes, will it be in the proper scope?

Answer: Internal devaluation will be carried out, but, to my mind, it is not likely to be to a sufficient amount.

Question: Will there be a default in Spain’s sovereign debt during the next five years?

Answer: Unlikely (I would prefer NOT to treat this assumption as a suggestion regarding investments in Spanish treasury bonds).

Question: Will Spain need international help to a seriously large degree?

Answer: Unlikely. If such help is necessary, then the demand will be not that great against both the size of the Spanish economy and  the size of the European Union economy.

Question: Can the problems in the Spanish economy provoke a new circle of crisis in the European Union and euro zone?

Answer: Not likely at all.