Europe's Maquina Infernal has crippled Spain

In Spain, unemployment has reached 24.4pc, or 32pc in Extremadura. More than 1.5m households have no earner at all Photo: EFE

Spain is spiralling into the vortex of debt-deflation. This has nothing to do with Greece. It is not the result of fiscal extravagance over the past decade, or other such Wagnerian myths. 

 By Ambrose Evans-Pritchard

 

The country’s collapse is the mathematically certain - and widely predicted - result of ferocious monetary and fiscal contraction on an economy struggling to deal with a housing bust.

Monetary tightening by the European Central Bank caused Spanish real M1 deposits to fall at an 8pc rate in mid-to-late 2011, guaranteeing the crash into double-dip recession that we now see.

Indeed, the ECB even let the broader M3 money supply contract for the whole eurozone late last year, badly breaching its own 4.5pc growth target. This was not purist hard-money discipline. Let us not dress it up with the bunting of ideology, or false authority. It was incompetence, on a par with the errors of 1931.

Spain’s Bankia fiasco has merely brought matters to head, though the details are shocking enough. A €4bn bail-out in mid-May. A €23bn bail-out two weeks later. You couldn’t make it up.

Investors have noticed that Deloitte exposed the rot, not the regulators. Bankia is the creation of the ruling Partido Popular, thrown together from regional cajas under its control. It was a sink for €30bn of bad debts from property developers, an instrument to "extend and pretend", to cover up the systemic awfulness of the housing crash.
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