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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Sunday, February 15, 2009

The Only Thing We Have to Fear Is Fear Itself

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.......

Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.
No, this is not Barack Obama speaking, nor is it (evidently) José Luis Rodriguez Zapatero. It is Franklin Roosevelt (FDR to his friends), speaking in his First Inaugural Address on assuming the Presidency of the United States of America in 1933. Ominous, isn't it, the resemblence between what he said then and what is being said now? You can read or (better) listen to the speech here.

Of course, with the benefit of hindsight it is easy to pick holes in some of what he did, as Harold L. Cole and Lee E. Ohanian do here.

Ohanian and Cole ask us: "Why wasn't the Depression followed by a vigorous recovery, like every other cycle", and I think the answer, as we are seeing to our consternation now, is because the Great Depression was about more than a simple cyclical crisis. It was a complex problem, and required complex and bold responses, just as our present problems do now.

Certainly the details of the New Deal policy may well have been far from perfect, and could well fall short of what we are able to come up with today, but it would be simply ahistorical to judge the efforts of then by gazing through the looking glass of the tools we have to hand now. We will not, or at least we should not, simply repeat previous mistakes, we should not be the prisoners of our own history.

At the same time I cannot help feeling there is more than a spoonful of ideological contorsion in the Cole and Ohanian view (which everyone should read for themselves, since the underlying issues are important), and in particular these seem to come to the fore when they fast forward to our present travails and how to deal with them:

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.


Especially the last sentence "a large fiscal stimulus plan that doesn't directly address....." would seem to get us to the heart of the matter. Reforms with very specific plans to update banking regulations or which confront an educational system that fails many of its constituents are surely badly needed, but they were as badly needed ten years ago as they are now. Investment in human capital and the stimulation of new technologies will definitely all be needed in any national recovery plans, but all of these will surely only work in the longer term, while what we badly need now are policies which will have immediate effect over the next twelve months. In the short term what we we need are very precise and specific forms of intervention, geered to our short term needs, to getting credit moving, to getting the US and Spain back to work, to restoring confidence among our populations, and to avoid the imminent danger of falling into ongoing price deflation. As I say have been saying in some of the comments sections lately, the most immediate first step in putting out a forest fire is not to start saving up for a new fire engine.

My argument here is addressed not to the United States, but rather towards the imminent danger of economic catastrophe in Spain, and towards those who shoulder some of the responsibility for trying to see that it does not happen. This year we will see between 4.5 and 5 million unemployed in Spain. Next year these numbers could rise to 6, or even 7 million. After two years standard unemployment insurance coverage runs out (in the best of cases) for Spanish workers, and there is no systematic system of social security in place as there is in the UK, France, or Germany. So if the worst gets to the worst, just how will these people live? How will they eat, let alone how will they pay their "oh so precious" mortgages. Here in Spain we need, desperately need, using Roosevelt's words, political leaders who realise that now is "preeminently the time to speak the truth, the whole truth, frankly and boldly", and we need them now. Otherwise we in Spain could drift off towards a climate where the only thing which is left is fear, the kind of fear which is itself nameless and unreasoning, an "unjustified terror which paralyzes needed efforts to convert retreat into advance".

13 comments:

Anonymous said...

Was watching a show about what happened when Japan went bust, bottom line was a massive increase in homelessness. We we're signing our new lease (rent with option to buy - would have bought but we couldn't come to an agreement on the price - surprise surprise) when our developer come accidental landlord mentioned how he is in the process of evicting 4 families. Now if your getting evicted that means you can't afford the rent and if you can't afford the rent how are your going to afford the 6 months deposit that all landlords are requesting.

From reading your blog I figure the real shit will hit the fan in 2011.

keep up the good work Rob

pepe fernández said...

I agree that the economy disease needs some acute treatment, but this alone will not face the major problem Spain has, a wrong business model based on pumping into the system huge amounts of "cheap-credit" to feed up a speculative domestic economy. I dont understand why we have to go on supporting this wrong economic model in order to get some doubtful short-term gain,at the cost of a sure long-term loss. that is the unsuccessful way chosen by Zapateros Government, worsening the crisis into a monumental depression.

On the other hand, if this acute treatment lies in reissuing a pervasive Rooselvelt new deal, then is better to stand still than trying to put out a fire with oil.

It is indeed astonishing how many
still agree with what Mr Rooselvelt stated in that speech of 1933 without realizing that Hitler in the same year, as he bade for the Kanzler office, sustained in his own speeches similar economic measures as Rooselvet was about to do. The history repeats itself, indeed, because we commit the same mistakes one and over again, trying to fix them afterwards with the same wrong solutions.

Greetings.

Hynek Filip said...

Edwaeard, thanks for the FDR quote, that is one I have not yet come across.

Our obvious disadvantage is that FDR lived in times when the population had a pretty good idea what work is about and was not scared by it.

Now, you have to deal with a bunch of overweight lifetime seven-hours-a-day clerks who would be ready to sow wheat in July and pick up peaches in December. What kind of work are they good for? The good old Keynesian construction of mighty industrial and infrastructure projects? Hardly ever.

You know, we will badly need people able to build highway tunnels and nuclear power plants, as well as scientists producing one technological miracle after another. However, at least in these parts, these guys will never be unemployed in the first place.

So we will have to employ the clerks and the call center staffers, and that will prove difficult indeed. I employ quite a few peeople myself, but none of this kind. They would love to get hard money for soft work, but I actually do not offer anything like that.

Anonymous said...

Edward you are one of the few people that can put across the seriousness of the issue here in Spain in a clear and easy to understand manner without resorting to Euro-bashing. I sense the frustration at the lack of action
in a country that you like very much and like me you have made your home.

As I am not an economist and therefore tend not to quote statistics but rely on looking at what I see around me. This came from living for many years in Japan where it was hard to get accurate facts about what was really going on but you could sense that all what not what it appeared. I could sense in the early part of 2005 that all was not well in Spain simply because it was too easy and too many people were making money for no good reason. It is clear to many that the Spanish model of Construction, Tourism and Manufacturing will disintegrate in 2009/2010. Construction has already gone, made worse by 2% interest rates in the boom years and Town Halls with no incentive to say no to any new building projects, it does not matter if the Spanish Banks were not involved in the American mess as every time I look out of my window I see empty flats and wonder who is going to pay for it all.

I work at a well known company that is shedding many jobs in Barcelona, it is a terrible shame but the product we produce is no longer wanted by the world and the factory is completely un-competitive. The sister factory in the UK is also shedding jobs but is looking a lot more competitive in a Global market because of the GBP devaluation.

By the end of the year we will have seen monthly layoffs in the order or 150 to 200’000 creating between 4.5 and 5 million unemployed, we will have seen the damage done to the tourist industry as not only the Brits but the Germans etc will be going no where this year, we will have more flats than ever and all of the Foreign owned manufacturing companies retreated to their home country as part of the conditions in their bail-outs. The numbers must be staggering !!

People are already starting to run out of the “paro” and are relying on family, however when the family has speculated on flats that are not sold and do not have any spare money this is going to get ugly.

I am prepared to say that I would gladly drop the 5 extra holidays that I get because I work in Cataluña and take a 20% cut in my Euro salary to make me more competitive with the UK right now if we stood a chance of keeping some jobs here.
However I fear that the action needed to be done in the latter part of last year by enough people for us to even have a chance of Spain surviving with any kind of industry left come the middle of 2010.

In conclusion, I applaud your Wake Up call but I fear that the people in the power
are simply not able to communicate the levels of scariness to the Spanish people and create the jolt needed to push through the reforms. It is probably better to let Ireland or Greece go first and see what happens before jumping on the coat tails of some EU wide proposal and just follow blindly as usual.

Hynek Filip said...

Anonymous, I would say that cutting wages would be a good thing to restore competitiveness, but you still need to add something. That is because you do not really compete with the UK, but with the CEE countries. Look at the car industry, for example - the Opel cars from Zaragoza directly compete with Czech Skodas from Mlada Boleslav, not with whatever the British have not yet forgotten to make. Despite the Czech Republic being a tiny little country, the car industry here amounts to more than a half of the British one. And the average wages? Less than EUR 800 gross per month. Productivity? Fairly high, the plants are max five years old.

I do not think that Spaniards could possibly go down to that kind of paychecks. So something else must be done as well. Better quality, better design, better engines, higher productivity. Takes lots of creativity and hard work. So in my view, the message from Spanish government should read as follows: accept massive wage cuts, work much harder, be much more creative and support your family and friends who lost their jobs.

Frankly, this seems to be the only way out of the current crisis, not only for Spain, but also for the Czech Republic. Our obvious advantage is that in EUR terms our wages have already been cut by much more than the 20% and we do not really have to bailout gigantic banks.

Otherwise (tourism, construction et cetera), we are pretty much in the same boat :)

Edward Hugh said...

Hello Both of you,


and welcome my British compatriot. I see we are both happy here in Barcelona. This is my home now, for good or ill.

Basically you both talk a lot of sound sense, and it is such a pity more people here cannot see this.

Hynek, you comparison with the Czech Republic is a good one I think. Now I see why you are so interested in Spain :9.

The macro of the CR is perhaps rather different from Spain at this point, as you are feeling the downside of excessive German and car industry dependence, but once the credit crunch is cured and people buy cars again (perhaps not as many as before, but more than now), and as Germany manages to claw back export growth, then you will be up and running again.

No one will have it easy in 2009 and 2010. But your model, while not perfect, basically works, while the Spanish one, founded on negative interest rates and external financing, basically doesn't, and certainly not in the new global financial order which will surely follow this downturn.

Incidentally, are you following Poland? Their top companies have all lost huge quantities of money (but huge) speculating forwards in the currency options market, just as the zloty tanked. A Polish reader sent me this:

I am frustrated by the sheer stupidity of it all – sometimes the financial directors took 100 times more options than their firms capital. Since this is OTC market (unregulated – like everywhere), the firms could go to many banks at the same time, making many bets with the same money. The upside of things is that many financial directors in those companies face criminal charges now.

And China has gone for real devaluation (ie wage cuts). My Chinese friend in Spore sent me this this morning:

"I used to work in a factory making flash drives for 1,600 yuan a month," she said. "Now I'd be happy to get 1,200 yuan. Before I came here, I was offered a job for about 700 yuan a month at a shoe factory in another city. I can't accept that. I'd rather go home."

as he says:

If this is anything to go by, workers in the export industries are only too glad to take a 25% wage cut. Many may be forced to take a larger cut. So we have an effective real devaluation already.

Looking at all this, I'm not sure which planet people in Spain are living on right now, I'm really not. This is why I put the "fear" title. I think deep inside many recognise all this, it's just they are frightened to think through the implications, since they are pretty scary.

And things are getting more and more crazy. Following the stoning of the bank in Cadiz in the middle of last week, I was listening to the local news on Saturday, and a local businessman has just been arrested in Lleida, for robbing banks. He robbed five of them, and all of it only to raise money to pay the debts of his company, which he was ashamed of.

rytu said...

Hi to all,

I see we came at the end talking about automotive market. I think it's one of the most distorted and it's so sane to base it's own economy upon it. I want now to drive your attention to what is going on in Europe. At the beginning we were speaking about supporting the financial system, now we are at real economy and almost all the sectors ask for (huge) aid. As usual automotive lobbyes are the strongest and watch at what happened in Italy.
First, the information (expecially the economic one, is fully controlled or influenced by industrial groups) and the news are coming out partially or with unfair comments. So warning were spread around even if Italian market was not doing so bad (and 2007 was a record year), than in Genuary many roumors about State supports to new car buyers, obviously everyone who is not in tremendous hurry wait for those agevolations.... and voilà in Genuary 2009 we have a -32% to Gen 08!! and the government put in action an urgent plan to reanimate the car market!!!
But, but... does Italy really need to buy more cars? none said that in Gen 2008 Italy was the first European market, largen than Germany, in 2008 Italy was the European second largest market with 2.160.131 new car sold, more than France and UK that have more inhabitants, Italian used car market is also probalby the strongest in Europe, Italy has 658 circulating car per 1.000 inhabitants, first place in Europe better than Germany!.
So again, does Italians really need to buy more cars? or maybe it's better for them (I'm Italian, actually I also pay taxes there with one company, but after many years living abroad I start to speak as separated from them) to use their resources for something else? that's what happens when fear and panic are spread everywhere. And someone start to put apples with pears, forgetting that each country, in this case each company, need a different strategy to come out of the crisis.
American car makers are walking dead, I don't see much sense to put all this money on them, they make products none wants to buy, at least maybe they can come in 5 years with a new portfolio, but at what price...
French producers also, after a good period in late 90s till some years ago, were doing fine, but their new models are not nice, so the contraction in volumes and value. they need soon new models and to low production costs (aka delocalization) but french government doesn't allow them to do so, and prefer to pay the extracosts by taxpayers' money. (and with a gret lie, the sector employees as maximum 3% of french workforce, not 10%)
Fiat now, I may say miraculously if I'd not know that miracles don't happen in economy, is doing very very well, their products are nice, allowing them to charge more added value, they have only a temporarly problem is excess of capacity in short term and the need to modernize the Italian factories to make these reach the productivity levels of their Polish unit (excellence in car industry). Also here we have basically political obstacles, with trade unions mainly, so the state use the crisis and green rethorics to continue to fund inefficiences.

Anonymous said...

Hello Hynek,

Reading through my last post I realised that I had confused you by not clearly stating
my position. I work in the Design Section of “said” company based right next door to their manufacturing facility here in Barcelona. In my world I am competing with the UK and not the CEE countries. (Not right now anyway!) but in manufacturing terms you are right that the competition is with the CEE countries as well as Ukraine, Morocco and Egypt.

I have been travelling regularly to your neighbour (Slovakia) for over 10 years and watched the whole transformation happen from sleepy backwater to Automotive Powerhouse but it is clear that the CR and Slovakia are heavily exposed to an Automotive downturn, in the case of the CR it looks like you are in a stronger position due to the ability do devalue and stay competitive In fact I know of a company planning its exit strategy from the Eurozone’s newest member because North Africa is cheaper, and so the wheel turns. (Or doesn’t, at the minute:)

Back in Spain, better design, better engines, green, green, green is going too take too long. The mess is now and we are fire fighting, Mr Sarkozy forgot that he was talking out loud when he mentioned bringing the CR factory back to France but this is how Europe’s governments are thinking right now and Spain stands to loose big time. As Edward mentioned in another post a 20% pay cut (wages and prices) across the board right now (yesterday) may work, this could just buy some time until the Spanish government can work out a new model.

p.s. Now that Slovakia has the Euro do you think that you (CR) can take advantage? If so are you seeing any evidence of this yet?

(oh and Hello Edward)

rytu said...

reporting the automotive case to Spanish reality, it can be applied to many other sectors rather than to spanish car makers.

i.e. let's talk about contruction and project development. As far as I remember, but I may be wrong, it represents 12% of so of the GDP and an equivalent % of workforce occupation. At the beginning of the boom it made great sense for Spain to focus on it, a huge and raising demand from Spanyards who wanted to move to better accomodations, millions of new inmigrants in need to live somewhere, and also million of other Europeans who wanted to have a second house in Spanish costs. Easy credit (not alone obiously) fuelled Germany in recovery a strong productivity in manufacturing, in Spain it was used to create massive wealth by real estate. But any market at the end arrives to an equilibrium level, here simply none saw it arriving, they did not stop and instead of using the profits and capitals in excess to diversify and build up new business, or improve the existing ones, they simply went on till arriving to 1.300.000 new unsold flats. That will remain so, as migrants are returning home rather than coming and English are questioning if buying more chalet in the costas.

So the point is, being approssimative to make things easy, does Spain need more flats? the risk here, very high risk with the influence the big developers and the banks that have to take money back from them have upon the government, is to put resources in company that will never recover, they are dead and will only rot.

Here we have very little to do, massive unemplyment will remain or even deteriorate if we keep thinking to (re)create jobs in reale estate. Resourses need to be used for an urgent intervention on "paros y bajas" to extend their terms to more than 2 years as the horizon is very gloomy, to implement a deep intervetion in training to improove their skillness, lower taxes and create a very friendly environment for DFI to create new factories, competing on this with Ireland, The Netherlands and CEE.
... and this is just a first little step in a long way to walk

Hynek Filip said...

Well, I must admit that carmaking is not my trade, thus my opinions should indeed be read as those of an enthusiast rather than a professional. I know a lot about banking, a whole big lot about debt collection and bits and pieces about reorganisation, restructuring and whatever else may be needed to save a company from disaster. Apart from that, I am just an amateur (my background from way back is law and finance).

Nevertheless, I could perhaps try to make an educated guess:

People will always need cars. They will never stop buying them.

Middle-income Europeans (such as the average Spaniards, Italians, Greeks, Slovenians and Czechs) will buy much fewer cars than they used to, and so will it remain for the foreseeable future (ten, maybe fifteen years). Looking at the current Czech and Spanish car sales, I would guess that the market will find bottom at about one thousand cars sold per one million people per month (45 000 new cars sold monthly in Spain, or 10000 here in the CR). It can not go much lower, because a car has a limited life and drivers simply must replace the old rusty cans with something new.

Now, the obvious issue is, who will keep on producing and whose factories will be closed. It is much too early to assess the impact of the CZK devaluation on Czech car sales, but the equation should be fairly simple: in times of recession, people want to buy cheap, Czech cars will be much cheaper, so the sales should get a pretty significant boost. What that will mean in the terms of units sold, nobody knows for certain. Skoda has another advantage, as its products are of the "value-for-money" class (its midsize sedans are apparently taxi-drivers cars of choice in quite a few EU countries, including the UK). If such products get even cheaper, people tend to buy them no matter what (that said, I have never, never ever driven a car with less sex-appeal than a Skoda, may God have mercy on their designers).

I believe that the Spanish manufacturers are in pretty much the same position. Good cars, solid brand names, value for money products. In some cases, they even look pretty good (Altea is a fine car, for example). But, the prices are becoming way too high, at least by the CEE standards. So if the prices can be lowered, all should be quite well.

Now, assuming that Spain and the Czechs will hang on, who is going to leave the market?

It now seems that GM is going to liquidate just about all they have in Europe, that is Saab, half of Opel and the British Vauxhall (Bloomberg said today).

I would also be very very skeptical about one of the French carmakers, namely Renault. Nicolas S. will do his best to save them, but what does Renault actually make? Upper-end cars? Can not recall any. Midsize? The new Laguna has not sold at all even before the depression. So they are down to Megane and the microscopic demo-cars, and competing against the multitudes of Korean, Czech, Slovak, Polish and other Eastern products, which are now getting so much cheaper. With French costs, there is no way they can survive.

Which leads me to my last point: Mr Sarkozy may wish to bring the whole PSA and Renault production back to France, but who would buy all those overpriced French-made cars, maybe apart from the French?

rytu said...

Cars will always be sold, but with the modern scales world volumes are not sufficient to keep all the players alive. FIAT CEO predicts we will have only 5 groups after the crisis, I quite agree with the huge difference that I see the market under innovation (no, not the green one) and I'm sure we will see some brand new car makers in the future.

I see no bright future for Spanish and Czech car industry, for the simple reason they are only production units for foreigner. I mean, nothing wrong with that, but you have to assume that this will always be a low value added sector as: 1. the valued added activities such as R&D, marketing, strategies, finance are and will be operated in Wolfburg; 2. no indipendence, that means Skoda and SEAT serve VW strategies, they will never allow these brands to replace premium brands as VW and AUDI.
So no matter what is the currency exchange or productivity level, Skoda prices and models will remain in a range.
SEAT in now meant to be a young sport brand, more or less like Alfa Romeo for FIAT. It's not wrong at all, this match with the modern Spanish image, allows higher prices, there is a clear strategy (or anyone wants to go back to that SEAT producing orrible FIAT clones?). But this brings low volumes, SEAT has to cover his market niche and that's all.
So anyway, better have car industry this way rather than have none.
But real growth and wealth come from other industries, you have to struggle to find them and be always on the excellence level.

rytu said...

Regarding the possibility that foreign car makers pull out their industries back home, well it's like to agree to commit suicide, but when you face bankroupcy and need NOW money from a white knight in the shape of your government, you agree to everything.

All the US car makers CEO have always said they don't see any future in electric cars, hydrogen fuel.... now they take the money and will use (waste) them to come with new "green" models, for sure very expensive, that nobody will buy but if the govermnet will impose severe restrictions to the other technologies

rytu said...

Hi Edward,

after reading some of my posts, maybe you can guess my thoughts :)
You put a link to the WSJ article, no surprise I agree with almost all the sentences, but I'd like to quote
"Some New Deal policies certainly benefited the economy by establishing a basic social safety net through Social Security and unemployment benefits, and by stabilizing the financial system through deposit insurance and the Securities Exchange Commission. But others violated the most basic economic principles by suppressing competition, and setting prices and wages in many sectors well above their normal levels. All told, these antimarket policies choked off powerful recovery forces that would have plausibly returned the economy back to trend by the mid-1930s"

Coming to Spain, I suggest ZP to stop greeting himself saying around the world Spain has overcome Italy and that France is just round the corner, to think back at all the new burdens his government put on companies and society in the last years and try to restore Spanish competitiveness

I also suggest, but here we are again to my personal approach, to avoid government to choose what industries to save, in which markets to enter and compete, just make if you know how Spain a favourable environment for private business. Spanyards know better what and how to do, if they don't surely foreigner will come with their capitals to make profits.

I'd like to quote another WSJ piece, from Mart Laar, former Estonia PM,
http://online.wsj.com/article/SB123447962323279585.html

Well, apart a semplicistic explanation to what is happening in Russia, probably to pay a chip to homeland reality, this policy proved many times to work out very well, in Estonia, in Slovakia (in some extentions also in Russia). What we have to do is "simply" to correct the inbalances and errors, in Estonian case it's called overvalued currency (the only thing Laar fear to pronunce). It's a major mistake, with no currency board they'd not have the massive forex borrowings and all the other distorsive effects, more attention to real economy at least.

No need to say, but I really have a strong and conceptual aversion to currency boards!