Proud Spain again humbles itself to the euro’s demands
With one in four Spanish workers out of a job, output contracting by the day and Asturian miners marching through the capital, the Spanish prime minister, Mariano Rajoy, has determined to push through a further €65bn (£51bn) of austerity measures, as if deliberately set on a strategy of economic death by a thousand cuts.
To say “determined” is possibly not the best way of putting it, for this is more like forced with a gun to his head; the latest austerity package is part of the conditionality attached to the eurozone loans for banking bailouts, thereby giving the lie to Mr Rajoy’s proud insistence that the Spanish bailout is in some way less of a subjugation than the others.
“We are living in a crucial moment that will determine the future of our families, our youth, our social welfare and all our hopes,” Mr Rajoy said. “That is the reality. We have to get out of this mess and we have to do it as soon as possible.” Well here’s a spot of advice. What was announced today is not going to do it.
In economic terms at least, developments in Europe look ever more like a repeat of what happened in the interwar years, where misplaced devotion to the gold standard and inability to resolve differences between creditor and debtor nations forced governments into ever more counter-productive policies.
What Spain is embarked on is a strategy of despair, a form of madness in which the patient deliberately does the wrong thing in the hope it will support the higher purpose – a currency union which is manifestly harming Spanish interests and is already effectively busted beyond repair.
What on earth does Mr Rajoy think he is doing applying a further huge drag to growth in an economy which is already in an apparent death spiral?
In attempting to cut its way back to fiscal sustainability, Spain is caught in a vicious circle of demand contraction which looks set only to make the fiscal problem even worse. Unlike Britain, there is nothing to mitigate the process of fiscal contraction by way of devaluation or monetary accommodation. It is as if the patient is forced to undergo open heart surgery without anaesthetic. The shock alone threatens to kill the subject.
Nor is Britain attempting anything remotely similar to the forced march back to balanced budgets imposed on Spain. You wouldn’t believe it to hear the howls of protest from Britain’s Labour opposition, but in fact UK fiscal policy is for the moment still expansionary.
What’s happening is not so much a fiscal contraction as the gradual withdrawal of the fiscal stimulus provided by an unsustainable structural deficit. This might sound a somewhat technical, and therefore worthless distinction, but it is real enough.
The structural deficit is being slowly dealt with, but the double dip recession has delayed meaningful fiscal contraction. Government spending is still rising quite strongly.
In Spain and other depression hit countries of the eurozone periphery, the inflexibility of the deficit reduction target appears to prevent such use of “automatic stabilisers”.
And the pain doesn’t end there. One of the conditions attached to European money for Spanish bank bailouts is that subordinated and hybrid debt holders are wiped out first. This might appear the equitable way of proceeding, for it seems manifestly unfair that taxpayers be expected to pick up the costs of banking insolvencies, leaving creditors largely untouched. To bail creditors in seems partially to answer public anger over the way bankers have been allowed to privatise the profits but socialise the losses.
Only in Spain, these subordinated debt holders largely are the public. They are not some imagined capitalist fat cat, strolling back to the office in Mayfair after a good lunch, but the banks’ own retail customers, mis-sold the debt as a savings product at a time when the banks were desperate for new capital.
Many of these investors would seem to have a cast iron case for compensation. If they are bailed-in, a fair old chunk of Spanish savings will either disappear up the Swanee, or the Spanish government will be faced with the ludicrous prospect of in turn having to bail them out again with money it hasn’t got.
It is one of those infuriating things, but it is in any case rarely a good idea to bail-in debt holders, for it only further increases the bank’s funding costs thereafter and therefore deepens the ensuing credit crunch. Insistence on bail-ins in the Spanish case is symptomatic of much wider policy failings in the eurozone debt crisis, with creditor nations determined to resist, virtually at any cost, the obvious solution of debt collectivisation and burden sharing. The eurozone’s apparent obsession with moral hazard on multiple levels is undermining all chance of meaningful resolution.
As was always apparent, monetary union won’t work without some form of fiscal and banking union, but for now there is little sign of willingness to cede the necessary sovereignties.
Unless the politics fast catches up with the economics, the economics will eventually and inevitably break Europe’s hubristic experiment in monetary union. In the absence of a volte-face from Germany and other creditor nations, the case for Spain leaving the euro has become unarguable, more so in some respects than even Greece.
Devaluation would bring immediate benefits to Spain in terms of export performance and helping to restart the deeply depressed property market. The large scale, euro-denominated liabilities of corporate Spain would present a major headache, but in time, the benefits of seizing back monetary sovereignty would far outweigh these contractual costs.
For the time being, history and pride prevent all but a small number of Spain’s more enlightened economists and commentators from recognising this reality, but the way things are going, something will eventually crack and the Spanish will collectively come to realise they are flogging a dead horse.
The euro is meant to be a symbol of European solidarity, but in practice it has become little more than a mechanism for maintaining German competitiveness at the expense of others.
For how much longer will Europe continue to tolerate this sort of economic nonsense? Signs of progress at the summit of two weeks ago are fast being revealed for what they were – yet another mirage.
By Jeremy Warner in The Daily Telegraph here
Last Updated (Monday, 23 July 2012 10:20)