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POLITICAL ECONOMY
Walker's World: Spain meets the Midwest
by Martin Walker
Paris (UPI) Jul 16, 2012


disclaimer: image is for illustration purposes only

It is an open question whether Spain or the American Midwest has delivered the worse news in recent days. The answer depends whether one thinks the political climate is worse than the meteorology and whether the fate of the euro trumps world food prices.

In Spain, protesting coal miners fought pitched battles with riot police on the streets of Madrid as the government announced tough new austerity measures, including a 3 percent hike in the sales tax and cuts in unemployment benefit and civil service pay, designed to save some $80 billion over the next two years.

Ironically, the miners weren't protesting against those new measures but an older savings plan that cut the subsidies to the country's uneconomic coal mines by 60 percent and threatened to decimate the industry.

Traditionally a highly militant group, with strong communist and anarchist traditions dating back before the Spanish civil war of the 1930s, the miners had walked some 250 miles from mines in the northwest Asturias region to their protest in the Spanish capital.

"These measures are not pleasant but they are necessary. Our public spending exceeds our income by tens of billions of euros," Prime Minister Mariano Rajoy told the Spanish Parliament.

"We are living in a crucial moment that will determine the future of our families, our youth, our social welfare and all our hopes. That is the reality," he added, in perhaps the bluntest speech yet delivered by a European leader on the severity of the crisis. "We have to get out of this mess and do it as soon as possible."

Spain, still paying almost 7 percent interest to borrow money despite the latest promises of $37 billion in support from its European partners for the stricken banking system, is following in the footsteps of Greece into mass unemployment and ever-deeper recession. But whereas Europe could manage the Greek crisis, which represented about 3 percent of Europe's gross domestic product, Spain is the fourth-largest economy in the eurozone with 15 percent of its GDP.

Worse still, in an analysis of the Spanish balance sheet last week Credit Suisse analysts reported that money was flooding out of the country, not only from foreign companies, investors and bond-holders but also from Spanish depositors. Capital was leaving at an extraordinary annualized rate of 50 percent of GDP, the Credit Suisse report estimated. If that rate were to continue for the rest of the year, the government would soon be running out of money to pay the police and the military, the last guarantors of public order.

Spain may not have much time. However, it has little choice but to wait since the German constitutional court, the country's version of the U.S. Supreme Court, has decided it needs a period of reflection to consider whether the European bailout plans are legally permissible. The court, the foundation stone of German democracy since the 1950s, has been asked to issue an injunction against the bailout plan, on the grounds that the German Parliament's authority over the budget cannot be diluted by given a supra-national body the authority to write blank checks on the German national account.

The court has already tied Chancellor Angela Merkel's hands with some key rulings, noting two years ago that the European authorities in Brussels seeking to use the Lisbon Treaty to enlarge its authority must remember that the nation states are "the masters of the Treaties." It also stressed that without changing the constitution (which would require a referendum) some critical aspects of public policy, including civic rights and budgets "must remain forever German." If Germany's democracy was deemed at risk, the court added, the country should be ready to "refuse further participation in the European Union," the court said.

This isn't exactly the Emperor Nero fiddling while Rome burns but it does leave Spain (and Italy) gasping for fiscal breath while German jurists weigh the constitutional arguments, as they are sworn to do.

And the news from the Midwest is equally worrying. Drought there has slashed official estimates of this year's corn crop by 20 percent and the price of con has jumped 40 percent in three weeks. Soy beans are at record highs and wheat prices are also climbing.

Four years ago, the surge on global food prices accompanied by a soaring oil price helped turn the subprime mortgage crisis into the global recession that hasn't run its course. At the same time, Russia, Ukraine and Kazakhstan have slashed harvest forecasts and warn that drought conditions threaten to reduce their total grain production by 35 million tons compared to last year.

American corn traders, Spanish miners, Russian wheat farmers and German judges are twirling together in a potentially macabre dance that reminds us that not are the economies and peoples of the world becoming ever more mutually dependent, but so are their banks, the debts and their institutions.

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