Here's the problem and the reason that the people are angry: Spanish unemployment is 25%. These austerity measures will only make this worse. How do we know this: Ireland, Italy, Greece, Portugal, United Kingdom, Spain. Oh, and the United States. And Keynes. And the Great Depression. You get the idea.

The German government and the ECB have been pushing an idea that was really stupid 3 years ago but now is just loony: if these troubled economies slash the size of their governments, businesses will magically have "confidence" and start hiring. Paul Krugman has come up with the idea that these people believe in the "Confidence Fairy." It's kind of like the Tooth Fairy, but without the evidence to support it. Think: the Great Pumpkin. The Confidence Fairy will rise up out of the periphery giving a booming economy to all good countries.

As with most of economics there are lots of feedbacks in these decisions. Because Spain doesn't have its own currency, fears of default push up interest rates, and this in turn requires more borrowing. Cutting government spending causes the economy to shrink, the smaller economy provides fewer tax revenues, and this in turn makes the government cut more spending. The only way this works is if the Confidence Fairy makes an appearance. But just like in every year's rerun of It's the Great Pumpkin, Charlie Brown, she never does.

Here in the United States, most of the coverage on this issue is from the German perspective. It is highly moralistic. It goes like this: GIPSI (Greece, Ireland, Portugal, Spain, and Italy) borrowed too much money during the good times and so now they need to tighten their belts and tough out the recession. (25% unemployment!) The problem is that this is all wrong.

Economics is not a morality play. It doesn't matter if the GIPSI behaved badly before; they're bad situation now is hurting everyone. But the fact of the matter is that of those 5 countries, only Greece's government acted badly. Spain (and others) had a budget surplus going into this recession.

What happened was that banks in Germany (primarily) thought that the EU's shared currency meant that loans to GIPSI were as safe as loans to Germany or France. When the recession hit and these countries had trouble paying their loans, the German bankers freaked out. Now, we're supposed to wag a finger in the faces of GIPSI: "You shouldn't have taken out those loans!" But somehow everyone seems to forget that it is the bankers and not the borrowers who are supposed to police the loans.

We've seen this same kind of thinking here in America. Rick Santelli famously started the Tea Party movement with his rant about how good people like him were being forced to pay for the bad loans other people took out. Even apart from all we know about predatory lending, this is a ridiculous contention. Parents know that if they allow it, their children will eat cookies to the point of illness. Similarly, bankers know that people want to borrow more than they can afford. Or at least they should know this.

Whether it is the Tea Party or the German government, there is no place for moralizing when cleaning up an economic mess. But of course, this idea worked half way. There was no moralizing about saving the banks. In fact, after saving them, nothing was done to stop them having to be saved in the future. But when it came to saving homes and jobs, well, those people got what they deserved.

The people in Spain are fighting back. I wish them well.

¡Viva España!


Democracy Now! has a good story about what's going on in Spain from the people's perspective. It contains some interesting reporting like the fact that after foreclosure and eviction, people are still held responsible for their loans. Wow.