Message #21661

[Charrington]

Local debt is the big untold story of the Euro crisis and, if that was not apparent before, it became glaringly so when Catalonia’s President this week told the world his autonomous Catalan Government would struggle to meet its bills at the end of this month.

Looked at from afar it might be difficult to interpret what this “local” problem means for Europe and those countries dependent on European consumer markets – but we’re always talking about a Euro problem when in fact it is a thousand local crises too. Put in American terms Catalonia’s problems are probably best likened to a successful area in the USA, like Austin, Texas, asking for a bailout.

The capital of Catalonia is, of course, Barcelona and Barcelona has a global reputation for excellence that stretches back to its management of the 1992 Olympic games.

A succession of charismatic mayors has turned Barcelona into a poster for regional economic success. Barcelona has done pretty much everything that the text book says a regional economy should do. It did “clusters” – it has a very strong cluster of companies in global logistics, it maintained regional manufacturing and grew a strong service infrastructure, it has a strong creative economy, the ESADE business school has a global reputation for management education, it has a very strong, competitive culture. And it has the world’s best football club, which gives the city global exposure week in, week out. Catalonia accounts for a quarter of Spain’s GDP. It is a success story.

But local indebtedness in Europe should come as no great surprise either. Germany and France bother have large local debt problems that are anything but transparent. In fact in the case of France much of the local debt was inherited from the central Government, which “delegated” the debt to localities where national funds were spent, effectively reducing the national debt headline figure. French finance Minister during this process was Christine Lagarde, now head of the IMF.

In April last year the Economist also warned of all the mini-Greeces in Germany:

    Germany’s 11,000-odd municipalities had a deficit of €7.7 billion last year, the second-highest ever…. in NRW( North Rhein Westphalia) local social spending rose by 274% between 1980 and 2006, whereas revenue went up only by 104%.

Local debt refinancing in Spain this year, though, is Euro 36 billion with Euro 13.5 billion of that falling to Catalonia. The reality is that, at this local level in Catalonia, the failure to refinance debt will lead to real wealth destruction and impair Spain’s prospects for years to come. When a success story like Catalonia hits the skids like this, you know the problem runs deep, very deep, but Catalonia also symbolizes something about Europe right now. It is not just a financial crisis but an existential one.

http://www.forbes.com/sites/haydnshaughnessy/2012/05/26/why-crisis-in-spain-this-week-should-have-us-more-worried-than-greece/