A Domino Called Spain
The truly terrible thing about the European crisis is its sheer inexorability. This week – last Saturday, to be exact – the Spanish government announced that it would seek help from its European partners. This was not to be called a bail-out package, because that would be embarrassing, but a bailout by any other name would stink as badly. This was the fourth member of the EU to be forced to seek support – the preceding cases having been Ireland, Greece and Portugal. Within two days, the list lengthened further, as Cyprus announced that it also needed help — albeit a mere three or four billion euro, not the 100 billion that the Spanish said they needed.
For people who actually follow the unfolding European meltdown, none of this was in the slightest degree surprising. The Spanish real-estate boom in the years up to 2008 was actually more intense and manic than that in the US, on a comparative basis. The Spanish banking system has been left with huge amounts of dud loans on its books but, like in Japan in the 1990s, the government and regulators conspire not to force the banks to mark these “assets” at anywhere near their true – i.e. very shrunken – value. This leaves the Spanish banking system seemingly functional but effectively ‘zombified’, meaning that it cannot give new loans to new businesses, because its capital is tied up (read wiped out) in the old ones.
Meanwhile, the Spanish economy has been spiraling downwards, because the façade of growth provided for several years by the construction industry has now crumbled into dust, exposing the bitter underlying truth – that the Spanish economy is rendered uncompetitive by the straitjacket of the euro, which has prevented Spain from its traditional policy of periodically devaluing its currency, since it no longer has one. As the realistic analysts have been saying all along, Spain is essentially Greece writ large. There are, of course, differences between the two countries, but they are not big or important enough to alter the key economic facts, headed by lack of competitiveness.
The same analysts, using the same underlying analysis, say that Italy is part of the same syndrome, writ even larger. This is also a gross over-simplification, which overlooks all kinds of differences, so that mainstream economists – those who work for banks, investment houses, government and international bodies – can write detailed analyses explaining why Italy is different and there is little or no danger of Italy being forced to seek ‘help’. As for France, it is of course absurd to talk about a financial crisis and the collapse of the French financial system. But by now, the pattern of the European crisis is so obvious that no-one – perhaps not even the mainstream economists themselves – believes that the differences are in anything more than degree and size.
That disbelief was fed in the case of Spain by the feeling that the Spanish ‘request’ had been imposed on it by the EU ahead of the Greek (repeat) election this weekend. The fear, in Brussels and all European governments, is that the Greeks will elect a government that will refuse to pursue the course of austerity that the EU has imposed on Greece – and will leave, or be expelled from, the euro as a result. In that event, the capital flight already underway across southern Europe will become an unstoppable flood of money and the Spanish banking system will be the first to collapse. By lining up EU help – in an amount much greater than anyone had previously deemed necessary – the Spanish were erecting a flood wall.
We will know what the Greeks have decided by Sunday night. But we already know that the Spanish move, which was riddled with legal, financial and political questions marks and lacunae, did not help Spain – or Europe, for that matter. European markets shot higher on Monday, but the effect faded the same day and by Tuesday there was hardly a trace of it left. Holders of Spanish government bonds, believing that the bailout would “cram them down” – i.e. make their claims on the Spanish government inferior to the new loans from the EU, sold their bonds and pushed the yields on Spanish debt higher than before. The Irish, hearing that Spain was going to ask for aid without having stringent conditions attached to it, realised that they should do the same – and the Greeks perhaps realised that in the game of poker they are laying with Germany, they actually hold better cards.
Another dramatic week, then, but when all is said and done, no real surprises. The European banking system is bust and cannot be salvaged. European governments have either borrowed too much (Greece, Spain, Italy) or promised too much to their citizens and are unable to deliver on these promises (everyone, including Germany and the other ‘strong” countries, but especially France). Rescue efforts will continue, summits will convene, plans will be announced, money will go from strong to weak nations, to repay the debts of the weak to the strong – but none of this will ultimately help. The euro is doomed, the European Union is severely damaged and facing existential dangers and the rest of the world will feel the fallout in many ways, for a long time. No new. Certainly no good news.