Saving Portugal and Spain: The situation (2)

This post is a continuation of the earlyer post on the situation of Spain and Portugal. There some of the unitil problems were discussed, the problems here are results of the earlyer problems. These non-the-less represent a serious threat to recovery on the Iberian Peninsula.

First there is the drain of young talented people: as i discussed before, the lack of innovative and growing companies means that there are no positions for young people. The continuous corruption on the high levels of society and the large bureaucracy are also responsible for demotivating youth. This means that young people will flee the country and will move to countries, in Europe but also outside. This is very bad for the home country since it is precisely these people that the country needs to start new companies, renew existing ones, reconstitute the governance structure, in short to construct the countries future.

Then there is the problem with trust, which is also one of the reasons young people are leaving. At this moment people do not trust the country to leave the crisis. This leads to less investments and lower credit ratings not just of the country but also of all organizations (banks, municipalities, companies etc.). The lower ratings and fewer investments in turn lead to less trust and less economic growth. What I mean to say here is that once a country has turned a certain corner it will fall down a cliff. The only way to fix a situation like this is either to go broke, wait a long time in misery and slowly rebuild your economy on the wreckage of the old one. Or, a more preferable option, make a grand gesture on something econmic and rebuild trust.

The unfortunate part is that countries that are already in distress are usually not able to make these gestures, since they are already in distress. The only way to make a good gesture yourself is to either present a workable way out of economic decline and insolvency (usually nearly impossible, since most plans only revolve around budget cuts and increased taxes. Most economists, even at the IMF know that that doesn't work) or the other way: embellish and lie. Show a suddenly growing GDP, show more investments, show a cleaner government, fire some important heads of institutions. It surely wont help your economy or your situation directly but if Portugal and Spain manage to inspire trust back in them. They might be able to turn the situation around as quickly as it emerged.

In the next part of this series I will talk about the more international aspects of the crisis.