Tuesday, October 16, 2012

Humpty Dumpty Fell Off A Wall...

The Business Insider has an article on "worst-case scenario" for Spain. The author notes that (a) Citi is predicting that Spain will enter a deep recession (-3.2% growth in GDP) next year which (b) will lead to Spain missing its budget deficit targets, requiring (c) the Spanish government to enact further austerity measures. From there, it may get messy:

Meanwhile, as Spain contracts, unemployment will likely continue to rise. However, it's already at unprecedented levels, as the chart going all the way back to 1983 shows.
Current levels of unemployment (under-25 rate = 52.9 percent; overall = 25.1 percent) have been more than enough to spur massive social protests in Spain.
As more and more Spaniards lose their jobs and become disenfranchised with the economic environment fostered by the Spanish government, the prospects for civil unrest will continue to become more serious.
Citi economist Ebrahim Rahbari sees 26.2 percent unemployment next year. That's more than a 1 percentage point increase from this year.
This will lead to more civil unrest and possible secession:
It's all down to growth on the one hand and politics on the other in the euro area.
Nowhere do those two concepts intersect more clearly than in the protests that have rocked Spain recently.
As the economy contracts and unemployment figures continue to make fresh highs, the Spanish government will find itself pressured on both sides by an angry electorate disenchanted with austerity policies and demanding creditors who want to make sure strings come attached with the aid they provide. 
. . . Catalonia may be Spain's most highly-indebted region, but it also accounts for the largest share of economic output, at around 20 percent of GDP.

And a nationalist party that wants to hold a referendum on secession in a region where 95 percent of the population dislikes the rest of Spain is only six seats away from a parliamentary majority in the November 25 elections.
Needless to say, losing Catalonia would be devastating not only for the government's fiscal position but also as a growth shock that would make the economic outlook even worse. And it would only serve to heap on the nationalist tensions at a time when Spain is facing intense political pressure both domestically and abroad.
Meanwhile, in an article from CNBC (via Yahoo News), Nigel Farage - leader of the populist U.K. Independence Party and a member of the European Parliament - stated in an interview:
"What will break [the euro] up in the end...will be one of two things," Farage said. "It will either be a democratic revolution in countries like Finland and the Netherlands, where they get governments who say enough, or it will be violent revolution in Southern Europe." 
He is not the only one worried about violence in Southern Europe. Reason's "Hit and Run" blog reports that the Swiss are also preparing for possible problems, including refugees:
 Coming on the heels of the European Union  being awarded the Nobel Peace Prize is the news that Switzerland is preparing its military to respond to possible escalations of violence related to the Euro crisis. "I can’t exclude that in the coming years we may need the army," Switzerland’s defense minister, Ueli Maurer was quoted as saying.  NBC News also reported Maurer questioned how long “money alone” could quell the crisis. The Swiss Defense Ministry is not ruling out deploying troops:
“It's not excluded that the consequences of the financial crisis in Switzerland can lead to protests and violence,” a spokesperson told “The army must be ready when the police in such cases requests for subsidiary help.”

It doesn’t appear that the Swiss are taking this as a too-far-removed possibility:
It launched the military exercise “Stabilo Due” in September to respond to the current instability in Europe and to test the speed at which its army can be dispatched. The country is not a member of the union or among the 17 countries that share the euro.

Swiss newspaper Der Sonntag reported recently that the exercise centered around a risk map created in 2010, where army staff detailed the threat of internal unrest between warring factions as well as the possibility of refugees from Greece, Spain, Italy, France, and Portugal.

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