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It's the economy, as always

28 Marzo - 2022

Jaime Batlle, Academic Director of the Postgraduate in Management Development in Sustainable Business

We know that debt is not unlimited. What we do not know is what the admissible leverage limit is, before it indicates the line that can no longer be crossed, without the structures failing to hold. The bad thing is that in economics the structures crumble before the latest optimistic forecast, always for the sake of the same argument: there was no other way out.

Before the pandemic the concern in the European Union (EU) was to contain the deficits. To Spain, without going any further, Europe discussed a 2.8% instead of a 2.4% fiscal deficit, far exceeding the 1.5% target. What a times!

The Draghi experiment had not miraculously overflowed any container, but we knew that the next step was to reduce the debt we had incurred after the 2008 crisis. That and no other was the objective when targeting the public deficit: reduce debt.

To mitigate the effects of inflation, there will be no other way than to raise rates, but raising rates means standing in front of a mirror

We lived under the scenario and vision of the German economic doctrine, characterized by pragmatism and the principle that in order to generate one euro of public debt, we had to be sure that we could pay it with the profitability generated by that same leverage, something that few European countries could and can say.

The pandemic came to pressure the European economy to notable limits, and faced with the dilemma between health or the economy (once again the argument that it was the only possible path), the simplest decision was chosen: generate debt and, on top of that, mutualize (more doping). With which the scenario was opened so that the most indebted, least productive countries, whose financial leverage is less than one, and where Spain leads by its GDP and population size, see the use of Next funds, to include them in the general state budgets and use them to pay current expenses and pave streets in a disguised and colossal version of that infamous plan Ñ.

The drama is that it cannot be done in any other way, because changing the structure of GDP and modernizing the economy is touching the structure and it takes between 12 and 15 years to see results, even if it is correct, which is another.

And in these came the war in Ukraine and accelerated the inflation that was already evidently emerging. To mitigate the effects of inflation, there will be no other way than to raise rates, but raising rates implies putting ourselves in front of a mirror that will give us a distorted image, in direct proportion to the volume of the debt and the inability to pay it.

And we all know that the problem, being debt, is of the same magnitude. That is, how we pay for it.
The magnitude of a debt and its repayment capacity is compensated by productivity and by the structure of GDP generation, especially and here the problem appears, unequally distributed in the EU space.

It is not the same to deal with excessive leverage with the inertia of high productivity and a first-rate GDP generation structure, than to deal with the structural shortcomings of the Spanish economy, which are well known.

It is not the same to deal with excessive leverage with the inertia of high productivity and a top-tier GDP generation structure, than to deal with the shortcomings of the Spanish economy

This being the case, raising interest rates will curb competitiveness and in a second step, due to the magnitude of the public and private debt, it will generate a drain on resources to pay for its service in a scenario in which leverage will not be possible.

The covid-19 first and the war in Ukraine are two realities that will hit the western economy, irremediably.

The third dire scenario is climate change, which will entail a brutal economic cost to production and will reduce demand, not only sensitive to price, but also to any factor that implies instability, such as those produced by climate change.< /p>

Hard times are coming, the President of our government has said. Really? We hadn't noticed. Some thinker has said that to fix this it is necessary to return to an economy of the 1960s. I would not dare to say so much, because we do not know. Nobody has the crystal ball.

Instability and war in Europe, they went on vacation in 1945 and we thought that the two boyfriends had run away from home. They have returned 80 years later, with more ailments, older. Now we are more people at home and it is dirty.

I don't know how we're going to manage it, although there will be civil, military or natural, or a mix of everything together. It's the economy! As always.

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