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Spain enters the eye of the Eurozone storm

Financial Events
By Paul Hodges on 03-Oct-2012

Spain.pngSpain is in the eye of the storm in the Eurozone crisis. Its economy is the 12th largest in the world, with GDP of $1.4tn. If it crashes out of the euro, then we will all feel the impact. And worryingly, the pace of events seems to be speeding up, even whilst the politicians continue in the slow lane.

The key issue is that governments cannot agree on a road-map to achieving political and economic union. Monetary union, in the form of the common currency, was never meant to exist in a vacuum, as the blog discussed in July. Thus today, we are in the worst of all possible worlds, where the euro exists – but without the political and economic backing required to sustain it.

Doing nothing is therefore not an option. The blog was in Spain last week, and it is clear that its monetary crisis is now becoming a political crisis.

Almost unbelievably, it even risks breaking up the centuries-old arrangements between Castille and Aragon that are the basis of the modern Spanish state. Last week, for example, Catalonia’s regional government announced new elections for November, as a prelude to a referendum on independence.

Catalonia, with Barcelona as its capital, is Spain’s richest region. Thus its political crisis is in turn creating an economic crisis. And the underlying reasons for this are shown in the chart above. Demographics drive demand and the ageing of Spain’s BabyBoomers (those born between 1946-70) means its economy has now gone ex-growth:

• The Boomers powered growth as they joined the 25-54 age group (blue column)
• This is recognised as the main wealth creating period
• But today, they are moving into the 55+ age group (green)
• Already, Spain’s median age is 41 years, with 28% in this cohort

Thus it is wishful thinking to imagine that Spain’s vast debts can ever be repaid. Even worse, as most Spaniards recognise, the sad fact is that much of this debt went to build housing, motorways and airports that will never even be used. It is no surprise that this toxic combination is starting to have major political implications.