|What are the Keynesians going to advise Spain to do? |
What they always do, austerity (for the middle class), huge dollops of stimulus, minimal or no debt repudiation, prop up failing banks, etc. The kind of stuff John M said the Germans were doing, but in fact were not. LOL! Must be nice to live in a bubble of certitude, a fact-free zone, imagine the world as one thinks it is.
Until the bubble bursts.
Anyway, the European solution, which now has the force of precedent, is to stimulate, guarantee debt rather than repudiate it, prop up the banks, etc. Because this is the way which has been chose, I think it likely that it will continue to be the way. A huge mistake, because the problems are becoming much, much larger as the larger economies become involved. Spain, Italy, do I dare say France? These are not Greece and Ireland, but major pillars of the European economy. If - as I think will happen - the same solutions are used as were used for the small fry, we will see enormous problems, implosions. Just a matter of time.
In a word, everything which has been proven not to work is likely to be used in connection with Spain.
The European periphery, including Spain, needs to follow Iceland's lead, a country which, adjusted for size, faced the worst financial catastrophe in history. Unfortunately, it is too late for the Greeks and the Irish.
Iceland refused to guarantee the private debts (bonds) of its big banks, let the banks fail, allowed its currency to devalue and imposed capital controls so that capital wouldn't hot-foot out of the country in its time of need. It did take IMF money, but this was inevitable considering the relative magnitude of its problems. This money is being paid back and it has made one early payment. It also put banksters in jail.
It hurt a lot. But for a short while. And it seems to have worked.
One of the main problems for the periphery is the Euro. No one country can devalue it. Accordingly, so long as the Euro is stuck at the 1.3-1.4 level, debt reduction via de facto devaluation cannot take place.