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Spain’s brutal cuts can’t lead to growth

A civil servant shout slogans during a protest against government austerity measures in front of the Treasury and Public Administration Ministry in Madrid on July 17. The poster reads, “This is a robbery.”


If you're under 25 and live in Spain, odds are you're looking for a job.

The latest numbers from Eurostat show 52 per cent of the country's youth are out of work. Such a hopeless employment backdrop makes it no surprise that thousands of Spaniards are taking to the streets to protest the latest round of fiscal austerity measures.

As part of last week's deal to secure bailout funds from the European Central Bank, the Spanish government is, among other steps, raising an already immodest VAT rate to 21 per cent from 18 per cent, rolling back public sector wages by 7 per cent, and slashing unemployment benefits to youth.

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The cuts, which will amount to $79-billion (U.S.) through 2015, are being enacted with the hope that when the smoke clears all of the budgetary slashing and burning will promote long-term economic growth.

Spain may be wise to check with Greece to see how well that plan works in practice.

Runaway government spending certainly isn't the path to prosperity, but, as the Greeks would surely tell their Mediterranean brethren, neither are brutal fiscal austerity measures.

The so-called policies of fiscal stabilization dictated by the Bundestag will only make the situation in the euro zone's fourth-largest economy worse, not better.

The savings such austerity measures are supposed to achieve will be upstaged by the dwindling revenues eked out by a shrinking economy.

As Greece's experience makes evident, unremitting fiscal restraint ultimately leads to neither deficit reduction, nor economic growth.

For countries already in the grip of punishing recessions, policies that lead to further economic strangulation only serve to make potential debt defaults even more of a certainty.

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If financially wayward countries such as Greece and Spain are to get back on the path of economic growth, they do have at least one arrow left in the quiver —leaving the euro.

By liberating themselves from the fiscal yoke of euro serfdom, the struggling countries of southern Europe could put themselves on better competitive footing with the stronger economies to the north.

Unfortunately, returning to the drachma and the peseta is not without consequences.

In Greece and Spain, inflation, to name just one potential plight, could become a dire problem in itself.

Any default would also quickly be felt in the rest of the world.

The same financial institutions that were hit by the US subprime crisis would find their exposure to the European debt market putting them in a painfully familiar spot.

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Germany, which has ladled out any number of scoldings to its fiscally errant neighbours, could also come to find their spendthrift ways weren't all bad.

German taxpayers may not like sending welfare cheques to Athens or Madrid, but they'll be even unhappier with what happens to their euro once the PIIGS (Portugal, Italy, Ireland, Greece, Spain) start leaving the monetary union.

Without the weaker economies to the south holding back the currency, Germany will be left with a much stronger euro, an ominous eventuality for the world's second-largest exporter.

If you work at Audi AG, Siemens AG or Mercedes-Benz, the value of the euro carries an outsized influence on not only your paycheque, but also your country's economic well-being.

If the PIIGS start leaving the euro zone, Germany's impressively stalwart economy may find that economic growth becomes as elusive as it is in Greece and Spain.

Jeff Rubin is an author and former chief economist of CIBC World Markets. His latest book is " The End of Growth." Read more from Jeff Rubin on his Globe and Mail page.

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