“As I presume a weaker dollar is a necessity in order to reverse the huge imbalances in the US economy, it seems like a situation unavoidable…”

Definitely. This is one of the key points. We may all cry “pain”, but if we go back to a higher dollar, and another US CA deficit the whole thing will be very unstable, since the US cannot grow, and US citizens are now too much in debt.

I think people generally underestimate the need to export. For some countries – like Germany – it may now be endemic, but for other countries, like Spain, the UK, Ireland, the US – exporting in the short run is essentially as it is the only real way to pay off debts (short of defaults).

When I make the cryptic point about the next episode, I am only talking about Spain (and maybe Latvia), since I don’t disagree that the short term situation is generally stable (it seems), but I think people are badly underestimating how serious the situation is in Spain. Not that it will blow up tomorrow or anything, but the deterioration will be constant and unremmiting, and thus there will be constant news – like yesterday’s manufacturing PMI (the worst across the globe of those surveyed) – for those who are listening.

“Watch this space for the next episode. It shouldn’t be that long in coming.”

I agree. Considering the latest comments from Dr. Doom Roubini & co, it may actually come later rather than sooner (in perhaps 2010/11 instead of next month), making it ever more painful.

And as a byline, what do you think a weak dollar, with a correspondingly strong Euro, will mean for the imbalances in the Spanish economy? Bad? As I presume a weaker dollar is a necessity in order to reverse the huge imbalances in the US economy, it seems like a situation unavoidable…

“Basically, the essence of what you are describing here is a situation where it would make sense for the French government to spend money in Spain rather than in France.”

Definitely. One part of the solution here would be this, create a bad bank, and then the French (and German) governments pay for the bailout. But we need to live in the real world. This is not the United States of Europe, and this isn’t going to happen. So the future remains “uncertain”, and frankly “worrying”.

Watch this space for the next episode. It shouldn’t be that long in coming.

Thanks for the input. I think the whole dempographic thing is too complex to go into here, but basically the Spanish economy is dying slowly, a day at a time, at the moment. Raising interest rates at the ECB will only serve to help it die more quickly, and cutting the quasi quantitative easing that is buying all that government debt up will only create a financial crisis which will baloon the bond spreads. No easy answers at this point. I absolutely agree with the following:

“I think the Spanish government must not only look to the problems, but also see new chances, and must be prepared to take some difficult and unpopular choices.”

But I don’t think it is realistic. Franco died in his bed remember. Spain is a country of complete “immobilism”. People are simply waiting for someone to come and rescue them. There are no serious proposals on the table.

Will the rescue come? I simply don’t know, I wish I did.

I read your article and it looks that the Spanish economy is in very bad shape, and the unemployment rate is rising steadily.
But is a bad economy automatically only bad for the society? This is a bit a question of perspective of course, I can guess how the average unemployed would answer this question. And for the short term this economical situation is obvious very bad for Spain’s inhabitants. But on a more fundamental level; does the current situation not also brings Spain’s society new chances? You always tell us that the demographic situation (the aging) will cause inevitable a huge problem in many European countries. Society will need a big workforce to take care for the elderly, and the money to train and pay for those workers. Well, with the current rate of unemployment it would be not so difficult to find enough people who can be trained for those jobs. Those new jobs in the healthcare would significant bring down the unemployment rates. Maybe the current closing CA deficit will give room for the government to finance this re-training project.
Because taking care of old folks does not contribute to exports, the Spanish living standard will inevitable going down. But the living standard in Europe is very high compared with a lot of other places in the world. To earn less doesn’t mean here to become poor, just to become less rich.
Economy needs a constant grow, but for a society enough is enough. When you have enough money to take care of your basic needs, more money is no longer one of the most important things to contribute to your wellbeing. After you are provided in your basic needs, having a satisfying job, a good relationship with family and friend, good health etc, are becoming more important factors for having a happy life.
I think the Spanish government must not only look to the problems, but also see new chances, and must be prepared to take some difficult and unpopular choices.
Ron.