Spanish pound shops need to raise their game

Britain's pound shops are much better than the Spanish equivalents - the equally ubiquitous but drab and uninspiring "Chino" supermarkets.

This matters because the sector is one of the retail sectors' rare growth sectors in tough economic times.  Spain's consumers and the Spanish economy generally could benefit from a revolution in the cheap and cheerful sector.

The UK pound shop sector has been revolutionised in the recent past with the rise of chains like Poundland and 99p Store. The  additional buying power they have has enabled them to expand their ranges and especially to offer more branded products.

Crucially the big manufacturers have been encouraged to make lines especially for the sector so you get Head and Shoulders shampoo for a pound albeit in slightly smaller bottles.

They are also very dynamic, always looking for new offerings so customers never quite know what to expect.  You often end up going in to buy one thing and coming out with half a dozen bargains.  On my last trip - to stock up on sweets for the kids (honest) - I was delighted to also walk out with two DVDs of the original Spiderman TV series which my kids love and which cost 5 times as much on Amazon.

Even celebs go to Poundland these days according to news reports.  Hard to imagine Spanish celebs going to their local chinese bazaar.  These never have anything branded or different and the presentation is woeful - like the contents of a Chinese container vessel have just been dumped into a cavernous warehouse.  Not everything is that cheap either.

Before the euro came along there were "100 centime" shops (about 60 c) which stuck mostly to the pound shop model, allowing for inflation.  The "hypermarkets" we now get in Spain charge pretty random prices with some of knick-knacks costing 60 or 70 cents but some going up to €1,80 or €2.

The bigger ticket items (like big Christmas present toys or electrical goods) are risky purchases even when the price does seem right as the quality is so variable and there are no guarantees.

I could be way out of touch here and maybe there are Poundland equivalents in parts of Spain that I don't know about.  But in the areas I know Spain is being badly served and needs a bargain-retailing revolution.

From our website:  Taxation of rental properties in Spain

10 reasons why stimulus is the problem not the solution

Last week I wrote that calls for more economic stimulus should be rejected because such measures demonstrably make things worse rather than deliver the boost they are supposed to. I listed 13 separate fiscal or monetary efforts made to stimulate the US economy since 1993 which have left it in a worse state than any time since the War.

Other countries which have run even bigger government deficits and run easy money policies for longer, like Greece and Japan, are in an even worse state.

Despite this dismal record policymakers (most recently the Bank of England with its QE3 programme) persist on trying to shove stimulus down our throats. Few commentators ever seem to question whether these “boosts” actually do more harm than good.

So, in no particular order, here are ten reasons why I think unfunded public spending, super-low interest rates and money printing are economically damaging and preventing recovery:

Sugar rush - stimulus only creates a temporary boost to demand at the cost of storing up demand-destroying effects for the future. One reason why most countries are suffering marked slow-downs now is that the effects of the 2008/9 stimulus packages have worn off.

Prolonging the agony – these false demand rushes do not just benefit healthy parts of the economy, they allow unhealthy, over-indebted and unsustainable parts to limp on: zombie banks, companies and, dare I say it, consumers.

Bad habits die hard – if you look at the way stimulus is supposed to work, it is in ways that are completely contrary to the long term interests of the countries being “helped”: encouraging consumption rather than investment; more borrowing rather than savings. Bank of England policy has been likened to “war on savers” which is just about the last thing the UK needs with a pensions timebomb ticking.

So now Inflation's a good thing? – the monetary authorities are expressly trying to create inflation with their policies and seem to be quite pleased with themselves when they create it. I am less sanguine. The BoE reckoned its first bout of QE generated up to 2% extra inflation. One reason why private sector demand is so depressed this year is high fuel prices which have been particularly affecting retailers. A lot of government spending is indexed to inflation so it makes the deficit reduction harder. Contrary to commonly stated opinion, high inflation doesn’t automatically erode debt. It may do this if wages rise faster than general prices but this has not been the case in recent years.

Leakage – A lot of the demand supposedly created by these stimulus measures leaks abroad in the form of increased imports or by encouraging investment capital to flee to emerging markets in search of better returns. The Chinese bubble that may be about to burst was made in Washington.

Moral hazard – The financial sector knows that every time the markets weaken, the fiscal and monetary taps will be turned on and they will be rescued. This has been done so many times - the term that describes the phenomenon, the Greenspan Put, was coined as long ago as 1987 – that the financial sector has a strong incentive to take ever greater risks because the downside is so limited. Stimulus is one of the main reasons for the “too big to fail” phenomenon.

Confidence trick – QE, fiscal stimulus and lower interest rates are all supposed to encourage business investment, which creates jobs and thus more consumer spending and thus more investment in a virtuous cycle. But if you were in charge of a business, would stimulus policy incentivise you to invest for the long term? Maybe a decade or so go but these kinds of measures have been tried and have failed so many times now that they are counterproductive and cause cynicism and confusion in the business community.

Bucking the market – True free-market believers are a dying breed these days. How else do you explain the lack of criticism, even from supposedly right wing politicians, for probably the biggest and most damaging example of state interference there is - central banks holding down interest rates below their market level. Interest rates are a price mechanism like any other: if you set the price of credit too low you will upset the delicate balance between saving and investing, investment now and consumption later. See this article to understand the theory of intertemporal misallocation which explains a lot of the current crisis: What Spanish Pigs Can Tell Us About Economics

Pensions vandalism – One common aim of stimulus measures of the QE variety is to lower bond yields which also has some nasty side effects for pension funds and retirees buying annuities. Is it really going to help our companies to have to increase the contributions to their pension funds? Will it help demand to impoverish pensioners? See this article from the telegraph There’s Another Fine Mess QE Has Got Us Into

Big Spenders – if you believe that governments spend (and then tax and borrow) too much, then take a look at stimulus as one of the main reasons for this. Look at Spain where low interest rates over-stimulated the economy, falsely inflating GDP and tax revenues thus encouraging the government to spend too much. And when the stimulus wears off, governments have a great excuse to spend and borrow even more to “support” the economy. One Nobel prize-winning idiot even claimed that an imaginary war against aliens would be a good thing because it would encourage the US government to spend even more trillions it didn’t have – Paul Krugman: An Alien Invasion Could Fix the Economy

OK, so this is a mish-mash of ideas and I haven't tried to distinguish between the different types of stimulus. Maybe different countries which might benefit from certain measures at particular times. But in general I believe that governments would be better to concentrate on balancing their budgets, cutting taxes and regulation and leave the economy, including interest rates, to the markets.

From our website: guide to Spain's Autonomo (self employed) system

It's a case of Good News, Bad News for Spain

Mixed headlines about the Spanish economy this week as the tourist sector delivers the goods, but unemployment continues to rise to an agonising 4.2 millions.

New figures reveal that Spain's travel sector experienced a very good Summer season. Visitor numbers hit a record high of 7.64 millions in August (up 9.4% on the previous year).

A separate survey showed Spain remains the number 1 choice in Britain (Spain's top market) for family holidays. Some have speculated that the Arab Spring and rising flight costs have caused some Europeans to choose Spain over more exotic and far-flung destinations.

Great news for the economy as tourism is Spain's biggest industry and employer. It is also the main source of export income which injects foreign demand into the stagnant domestic economy.

That's the good news. The bad news came from unemployment stats showing a net increase of 95,000 on the unemployment rolls to record another new high of 21%. The two bits of news are probably connected as tourist jobs are inevitably seasonal and some will have already been laid off last month.

Another component of the jobs woe however is more worrying. Reports say that there were heavy job losses in the public sector as local government in particular sheds employees. Teachers are being laid off for example and are going on strike in some areas.

Many local authorities which profited from high property-related taxes in the boom (and spent accordingly) are now deep in debt and some are not settling their bills and being taken to court by contractors such as rubbish collectors and cleaners.pp

It's all a reminder that austerity isn't painless and that, although Spain has made decent progress in getting the deficit under control, that very process may deepen the economic crisis.

From the website: Changes to Spanish Tax Form 210

Spanish protesters are indignant about the wrong things

Anti-Crisis protesters, indignados ("indignants"), have been marching across Spain to express their frustration and outrage at the country's economic situation - and the measures being taken to tackle it.

You can understand why people are out on the streets, particularly the young, with even a university education proving almost useless in the face of 20% unemployment. On top of that there are public spending cuts biting and laws being passed to erode pension and employment rights. People feel they are being punished with austerity and economic misery for the sins of others, mainly bankers and politicians.

Do the indignados have a point? What are their arguments and do they stack up?

Protesting “against” the crisis is pretty pointless because you can’t protest against an economic state, but that’s what a lot of the indignation seems to boil down to – a need to let off steam and vent frustration. Some protesters though have articulated anger against specific policies, people or institutions they hold responsible for causing the crisis or worsening its effects. From what I have read these are the main grievances:

- Unemployment

- Reduced pensions

- Reduced employment protection

- Austerity in the form of tax increases and spending cuts

- Corruption

In terms of who they are angry with, apart from the politicians and banks, it is chiefly Europe because of a "Euro Pact" made in the spring forcing deficit countries to reform and enforce fiscal discipline (as one Spanish paper sees it The European Pact punishes workers and social spending)

My problem with these protests is that they protest against the problem and the most likely solutions at the same time. By all means be angry about unemployment but don't then complain about changes to worker protection laws because these are desperately needed to increase employment. Similarly it is dubious to protest about public spending cuts when it should be quite obvious from the Greece situation that things could be much worse for Spain without some short term pain now. Also attacking Europe as if it is some kind of Thatcherite institution administering harsh economic medicine is ridiculous - they should not be attacking the Euro Pact, which is just what Spain needs, but challenging the Euro which is at the root of a lot of the misery.

Reading one website's description of the protests (Indignation against the crisis and for a general strike) I was struck by the truth of one reader's comment in reply-

"The indignation is against a lot of things And for that they are? What specific solutions do you propose? What will you do to feel represented? The solutions are not free rain from the sky"

I quite agree. At this stage the protests merely look like a disorganised and contradictory series of gripes. I too feel the politicians of Spain have let the country down (although the country was happy to play along during the boom), but actually now they need to be more radical and stick with a reform agenda rather than cave into these woolly headed indignados.

Zapatero gets the message

If he means what he says (a big if since he is a politician) it seems like the Spanish PM, Jose Zapatero, has finally got the message. At a meeting with business leaders to discuss reforms this week he said all the right things:

Zapatero accepts the need to accelerate reforms

He's talking about reforming pensions by February and restructuring the weakest savings banks by Christmas. In addition he says that regional governments, who account for about half of Spain's public spending, must start reporting their deficit-cutting progress every quarter.

Up until now he has dragged his feet on reforms, mindful of how unpopular they are on the left of his party and indeed with the electorate as a whole who I suspect mostly don't accept that things need to change if Spain is going to survive and compete. Now Zapatero talks about "accelerating reforms to the max" ... "whatever the personal cost". His new-found zeal as a reformer presumably owes its origin to the Irish crisis and the widespread view that Spain could go the same way ("The difference between Spain and Ireland is timing").

Another reason for urgency is the need to restore some credibility ahead of the first 4 months of 2011 when, according to Barclays, Spain and its banks need to raise 70bn€ in the bond markets, which they think will lead it to ask for a bail-out next Spring. Sounds plausible if you think Zapatero' reforms are too little too late, the Spanish banks are in worse shape than they admit and that austerity measures announced so far will push the economy back into recession. In this case now would be a good time to reduce your exposure to the Euro (or even short it if you are feeling brave) because this will be a calamitous bail-out too far for the currency to bear. On the other hand European leaders know this and may have a few tricks up their sleeves to ensure Spain pulls through e.g. I could easily see the ECB printing money to buy Spanish government or bank debt. Whatever happens it's going to be an interesting 2011.

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The difference between Spain and Ireland is timing

So Ireland finally caved in and went to the EU and the IMF for a loan. The point for Spain though, is will they eventually be brought down by the same pressures that did for the Irish?

The consensus appears to be no it won't. The markets and most commentators seem to accept that Spain is a different proposition and can pay its way. At an important bond auction last week, in the midst of the Irish uncertainty, Spain did manage to sell its latest batch of debt for an acceptable yield (10 year funding cost them 4.6%). There are good reasons to think that Spain is in a much stronger position:

Ireland's economy has shrunk more than any other in the EU economy during the crisis, shows no sign of recovering and the fiscal position of the government (excluding bank bail outs) is getting worse. Spain's economy has at least stabilised in 2010 and is at least not shrinking (Q3 GDP Spanish growth was 0%). The government's deficit as a % of GDP is narrowing to single figures and the government has set up major public spending cuts and tax rises to bring it down further.

Ireland was sunk by its banking sector more so than its public sector debt. In 2007 the Irish public sector deficit was the lowest in the EU at 25% of GDP and even with the crisis had only risen to just over 60% this year. However in 2010 the Irish deficit has ballooned to a remarkable 32% mainly as a result of the cost of bank bailouts, principally the AIB and the Bank of Ireland.

The markets just did not accept that the Irish could afford the guarantees given to these banks - the government had guaranteed 100% of their deposits and made some commitments to the bondholders of backing these bank. Ireland could not afford a bank bailout and get its deficit under control at the same time.

So, Spain in the clear? Not quite. There are some worrying similarities between Spain and Ireland's predicament:

- both economies are stagnating even before austerity cuts and tax rises have started to bite. Neither have the option of devaluing their currency to boost exports as they are stuck in the Euro.

- both not only had massive house price booms and bust they are both (unlike say the UK) still suffering the aftermath in terms of mountains of unsold properties dragging down prices

- Spain has its bank problems too. See Spain's economic crisis turns nasty

- Spain and Ireland have both lost control of their monetary policy so cannot engage in Quantitative Easing policies like the UK and US have done

- Spain is struggling to make its budget deficit-narrowing plans work (partly because tax revenues are stagnating and partly because the autonomous regions are not cutting spending to plan)

- if it were to suffer a double dip Spain would have nowhere to turn. In 2008/9 the government was able to spend its way to prevent the worst of the recession and even then it was pretty awful.

So if both economies are in the same predicament - deficits, austerity, stagnation, stuck in a Euro straitjacket - what sets Spain apart? The markets seems to accept that the scale of the Irish banks' problem set it apart. But I have my suspicions that Spain is more vulnerable than it appears on this front. The banks avoided much of the pain of the housing market crash by dodgy accounting and putting off foreclosures. They have in any case become the most reliant in Europe on borrowing cheaply from the European Central Bank. Another spiral down in house properties and an increase in repossessions - hardly outlying propositions - and the game could be up. Ireland today, Spain tomorrow? Watch the housing market.

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Trouble down at the Ayuntamiento

We have all heard about Spain's debt crisis at a national level and the proposed austerity drive, but I have been reading an interesting article in The Telegraph which suggests things may be even worse locally. According to this article - Spain Relying on Short Term Funding as Councils go bust - there is trouble brewing down at the Ayuntamiento (Spanish town hall) in the form of:

- tax revenues down 30% because of the property bust

- 20% cuts in central government funding for municipal councils

- 400 councils across the country not paying water, electricity or phone bills

- "most" councils in Andalucia bankrupt or surviving day to day

A mayor was quoted as saying:

"I am deeply ashamed to know that I won't be able to pay our staff. They have got mortgages, children. What am I supposed to do? We were not able to cover our payroll in June. Neither I nor our councillors have received anything for two years. I've had two heart attacks. My health is cracking. If we cannot solve this, I'm resigning."

Not only are council staff living in fear of not getting paid they are having more work to do. Once council (San Sebastian) has seen a 68% jump in applications for financial assistance in 4 years. Managers are calling for more resources and staff although everyone else is calling for councils to shed staff and costs as part of the solution.

Little surprise then that the councils have their begging bowls out. FEMP (the local government association) has demanded 3 billion € from the government to see cash-strapped authorities through. This would be in the form of easy credit. Councils already had racked up debt of €35 billion by the end of 2009.

Is debt the Spanish national disease? Or is it an addiction that is proving painful to kick? The truth is that Spain's position is similar to most of the rest of the Western world from Washington to London to Tokyo. The "solution" to the original economic crisis was more borrowing at national level, and we now seeing this false comfort slipping away.

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The Pain in Spain - who is to blame?

I read an interesting debate recently between leading economists about whether the Spanish economic crisis was of Spain's own making or whether Spain was the victim of failings in the Euro or of the global crisis more generally. My view is obvious from the title of the article I wrote on the subject which was published recently here: The Pain in Spain is Mostly Self-Inflicted | Alrroya

Governments love to blame international forces beyond their control for economic ills at home. Gordon Brown was a dab hand at this. But when a boom which involved a tripling of debt and house prices ends in a bust should we really be surprised? And could the governments of Spain and the UK not have stepped in to end the excesses long before their economies got addicted to debt? I think so and let us hope they don't let booms get carried away again although looking at both countries the next boom seems an awfully long way off.

History of Spain's crisis