Bonds and the single currency seem undecided as to whether the latest austerity measures in Spain amount to throwing a drowning man a brick or a lifejacket. For the moment, they are going for a lifejacket, although this goes against the grain of history which shows that piling on more austerity is no way to pull an economy out of recession and restore public debt to more sustainable levels. The latest measures announced by the Spanish PM amount to the fourth dose of austerity since the new government came into office towards the end of last year. It includes increases in the sales tax and also the withdrawal of incentives to encourage participation in the property market, with the impact of the EUR 65bln of measures being spread over the coming two years. There is also talk in the FT newspaper of Spain being forced to inflict losses on holders of Spanish bonds, although this would be politically very difficult given that many retail investors hold these instruments.
The mildly positive reaction seen on bond markets has given the euro some support through today’s morning session, although it has to be said that this has been modest at best. Deep down, markets know that austerity alone cannot be the answer and indeed, it can quite easily turn into a brick which could help the eurozone drown that much more quickly.