Economic Outlook: Will Spain implode?

By ANTHONY HALL, United Press International  |  April 10, 2012 at 10:11 AM
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Is anyone else waiting for Spain to implode?

Self-destruct might be the applicable verb. At a conference in Madrid this week, Finance Minister Luis de Guindos said the government should hold firm to its commitment to lower its budget deficit to 5.3 percent of the gross domestic product, a tough step away from the 8.5 percent of the GDP in 2011.

To do so, Spain is aiming to cut $13.1 billion from health and education programs on top of about $30 billion in cuts and tax increases announced last month.

Has this given investors confidence? Quite the opposite, as yields on 10-year benchmark government bonds rose to 5.88 percent Tuesday.

It turns out, Europe is clearly willing to stay the course on gutting its various economies one by one. The European Commission, meanwhile, "applauded" the new cuts, The Wall Street Journal reported.

Granted, getting a handle on deficits is an important step for governments to take. But the painful truth is that Spain's economy is expected to contract 1.7 percent this year, which means the calculators will not even cool down before the numbers have to be crunched again with lower expectations every time. Erasing jobs creates discontent. The problem is, what do you erase after that?

In Washington, President Barack Obama is ready to press forward with the so-called "Buffet Rule," which would effectively raise the federal income tax on the wealthy to 30 percent.

The cutoff point for this new tax bracket would be $1 million in annual income or more, which will mean the tax would come off as entirely symbolic and entirely doomed to flop. It would be easy pickings for Republicans who will denounce Democrats as anti-business or anti-innovation. What is it the Democrats find so awful about success, anyway? You need rich people to hire poor people. Everyone knows that.

But the reason it will fail is purely mathematical. If imposing the Buffett Rule is a sly way to crack the ice and eventually eliminate the Bush-era tax cuts, then it is a sound idea. If it is part of a long-term strategy, it makes sense. But the pitch that "this just isn't fair for the wealthy to pay so little," is a moral argument that doesn't ring true in a capitalist society.

The argument should be mathematical because even if the Buffett Rule was to get through Congress, a year or two later, too little will have changed to give Obama bragging rights.

In international markets Tuesday, the Nikkei 225 index in Japan lost 0.09 percent while the Shanghai composite index in China added 0.88 percent. The Hang Seng index in Hong Kong slid 1.15 percent while the Sensex in India rose 0.13 percent.

The S&P/ASX 200 in Australia gave up 0.64 percent.

In midday trading in Europe, the FTSE 100 index in Britain shed 0.81 percent while the DAX 30 in Germany lost 0.87 percent. The CAC 40 in France dropped 1.56 percent while the Stoxx Europe 600 fell 1.14 percent.

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