The trillion euros lent out by the European Central Bank for three years at a rock bottom interest rates were supposed to do two things – throw a comfort blanket around Europe’s wobbly banks and pump money into moribund economies. Some new data from struggling Spain confirms that while there may be a bit of a case for the former, the latter is still falling short.
Mortgage lending by Spanish banks had their largest annual drop in more than six years in February – coming in at essentially half of what they were a year earlier. There are all kinds of reasons for this, not the least being that large numbers of Spaniards are out of work and house prices are still tumbling with at least one estimate being that they remain as much as 30 percent overvalued.
Austerity in the euro zone seems to be working — at least as far as the headline, dry, soulless numbers of budget balancing are concerned. Bailed out Greece and Ireland have reported substantial improvements in last year’s profligacy performance. Spain, while going in the wrong direction, at least has the satisfaction of being told it is not telling fibs.
We will get to the smoke and mirrors in a bit.
First Greece, the euro zone’s poster child for budget ill-discipline. The 2011 budget deficit to GDP ratio – basically the annual overspend — came in at 9.1 percent. This may seem like a lot given the EU target is 3 percent, but it was down from 10.3 percent a year earlier and from 15.6 percent the year before that. Furthermore, if you take out all the debt repayments costs that Athens has to make , you end up with only 2.4 percent (although in truth that is like pretending you don’t have a mortgage).
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The Law of Diminishing Returns states that a continuing push towards a given goal tends to decline in effectiveness after a certain amount of effort has been expended. If this weren’t the case, Usain Bolt would be able to run the mile in less than 2-1/2 minutes.
From an economic standpoint, this law now seems to be fully in force in Greece. The latest jobs figures from the twice-bailed out euro zone country paint a bleak numerical picture of the impact of unrelenting austerity in ordinary Greeks, regardless of whether it was self-inflicted or not. To wit: