Will Spain Inevitably Follow Portugal, Ireland and Greece?
NEW YORK - Not since civil war engulfed Spain in the 1930s has so much ridden on the defense of Madrid.
Back then, the Nazi-backed nationalists sought to topple the Soviet-backed Republic behind its ramparts in the Spanish capital. Today, the Germans are playing both sides, riding to the rescue of Spain's debt-ridden European Union partners - the Greeks, the Irish and the Portuguese - under conditions that many economists believe will push Spain, a much larger, more important economy than any to fall so far, to the brink of disaster.
Last month, Spain raised money on world financial markets, something all countries running deficits, including the United States, do regularly. In the wake of Portugal's bailout request last month, however, the yield on the Spanish 10-year bonds - in effect, the cost to Spain to borrow the money it needs to run its government - rose to 5.47 percent, up half a percentage point from the last auction on March 17. While that may not seem like a lot, for a country struggling to avoid the fate of Greece, Ireland and Portugal, it counts as a very poor omen.
It also confirms a disturbing pattern:
1) The ailing government reaches the end of its credibility in arguing that it can repay its debts. Greece, Ireland and Portugal's governments all eventually folded. Late in March, Spain's Socialist Prime Minister Jose Luis Zapatero confirmed he had a firm grasp of opinion polls, promising not to run for reelection next year after overseeing waves of austerity.
2) Resentment builds toward foreigners and the IMF. In Spain and other troubled EU debtor nations, EU institutions perceived as representing shadowy German interests are now widely resented, and some wonder whether Berlin is using the crisis to achieve the kind of dominance over the continent it failed to achieve in previous generations.
3) The population grows furious at round after round of austerity, government layoffs and benefit cuts. Spain, like its indebted brethren, has seen regular strikes and demonstrations by trade unions and other civic groups.
4) Finally, as the yields required to sell government bonds rise toward double digits, the country goes tin cup in hand to its wealthy EU neighbors, hoping an infusion of cash can stave off the disaster: default, the national equivalent of bankruptcy.
The Germans Cry Uncle
But the wealthier nations now appear fed up with bailouts that force multi-billion dollar transfers from the fastidious euro zone "core" - Germany, primarily, but also Finland, the Netherlands and France - to the profligate "periphery." These nations, whose former national currencies (and thus, their citizens' life savings) were effectively devalued each time the euro zone welcomed a less efficient member country, all now face serious political backlash against further bailouts.
Since the initial bailout of Greece last year, German Chancellor Angela Merkel's coalition has frayed and sputtered, losing its majority in the upper chamber of Germany's parliament, along with a string of local elections to its more inward-focused Social Democratic rivals and the upstart Greens. Public anger against further transfers to Germany's poorly run euro zone brethren is seen as a major force behind this disapproval. Similar upsurges in anti-EU sentiment tripled a right-wing party's showing in last month's Finnish elections and has anti-immigrant, anti-bailout parties rising in polls in the Netherlands, Belgium, Italy and France.
Medicine Worse than the Disease?
For all the complaining among the rescued countries, Germany has proven very generous in terms of the amount of money it has committed to a new EU sovereign rescue fund. Yet Germany also has insisted, in exchange for its participation in these bailouts, on interest rate hikes at the European Central Bank and that the countries involved make deep cuts in public spending, open up labor force regulations and raise retirement ages. Portugal announced Tuesday it had reached a 78 billion euro ($116 billion) bailout deal, agreeing to reduce its deficit to 3 percent of GDP in 2013.
While most economists see these reforms as long overdue in places like Greece and Portugal, they also come amid deep recessions in the euro zone's peripheral nations. In effect, ordering up austerity during deep downturns, German policymakers may have ensured that these smaller economies will fail to produce the growth necessary to ultimately turn things around.
The worse already appears imminent in Greece, bailed out last year but now increasingly unable to live up to the terms of its rescue. There is open talk among Greek politicians now of imposing huge losses on the holders of Greek government bonds - a "haircut" which would effectively end Greece's access to international borrowing, making it either a ward of the EU or, worse, subject it to expulsion from the common currency.
Navigating the rolling train wreck of sovereign debt in the euro zone has proven almost impossible for the complex, supra-national politics of the EU. Efforts to absorb relatively inefficient and uncompetitive economies into the larger EU during good times paid too little attention to fiscal matters.
In spite of the fact that both Germans and, say, Spaniards get paid in euros for their labors, their governments are still free to set their own national spending policies separately. In most cases, this means borrowing on world bond markets to fund chronic deficits. The lack of discipline in some of these countries has now come home to roost.
Once the global financial crisis exposed the risks that European banks had exposed themselves to by lending to profligate peripheral governments, international bond markets rebelled. The costs of borrowing to cover government spending spiraled out of reach for the Greek, Irish and Portuguese governments.
Will Spain now follow? The world should hope not. Spain, with an economy that ranks as the 12th largest in the world according to the World Bank, will not slip beneath the waves quietly. The world's banks, mostly European but also many large American, Arab and Japanese banks, are deeply exposed to Spain's debt woes, which have their roots in a property bubble that burst in 2007.
Unfortunately, the handling of the crisis by euro zone governments - again, taking their cue from Germany - continues to be marked by denial (as to the depth of the crisis), shortsightedness and political self-interest. At best, the current approach is pushing off the day of reckoning; at worst, it is allowing a much larger crisis to fester, threatening not only the ability of Spain and other governments to repay their debts, but the viability of the European Union itself.