Eurozone countries on June 9 agreed to lend Spain up to 100 billion euros ($125 billion) to stabilize the Spanish banking system. Because the bailout dealt with Spain's financial sector directly rather than involving the country's sovereign debt, Madrid did not face the kind of demands for more onerous austerity measures in exchange for the loan that have led to political instability in countries such as Greece.
There are two important aspects to this. First, yet another European financial problem has emerged requiring concerted action. Second, unlike previous incidents, this bailout was not accompanied by much melodrama, infighting or politically destabilizing threats. The Europeans have not solved the underlying problems that have led to these periodic crises, but they have now calibrated their management of the situation to minimize drama and thereby limit political fallout. The Spanish request for help without conditions, and the willingness of the Europeans to provide it, moves the European process to a new level. In a sense, it is a capitulation to the crisis.
This is a shift in the position of Europe's creditor nations, particularly Germany. Berlin has realized that it has no choice but to fund this and other bailouts. As an export-dependent country, Germany needs the eurozone to be able to buy German products. Moreover, Berlin cannot allow internal political pressures to destabilize the European Union as a whole. For all the German bravado about expelling countries, the preservation and even expansion of the existing system remains a fundamental German interest. The cycle of threats, capitulation by creditors, political unrest and then German accommodation had to be broken. It was not only failing to solve the crisis but also contributing to the eurozone's instability. In Spain, the Germans shifted their approach, resolving the temporary problem without a fight over more austerity.
The problem with the solution is that it does nothing to deal with the larger dilemma of European sovereignty and debt. Germany is taking responsibility for solving Spain's banking problem without having any control over the Spanish banking system. If this becomes the norm in Europe, then Germany has moved from the untenable threat of expelling countries to the untenable promise of underwriting them. Europe, in other words, has accommodated itself to the perpetual crises without solving them.
In our view, the root of the problem is the struggle to align the world's second-largest exporter with a bloc of nations that ought to be enjoying positive trade balances but are instead experiencing trade deficits. Germany, however, views the root of the problem as undisciplined entitlement and social program spending that leads to irresponsible borrowing practices. Thus the Europhiles, led by Germany, don't look for solutions by redefining the European trading system, but rather by disciplining countries, particularly within the eurozone, on their spending and borrowing practices.
According to a report in German magazine Der Spiegel, European Central Bank President Mario Draghi, Eurogroup President Jean-Claude Juncker, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso are drafting a plan to stabilize the system. Under the purported plan, all eurozone members would be required to balance their budgets. Borrowing would be permitted only if approved by a Europe-wide finance minister, a position that would have to be created and supported by a select group of eurozone finance ministers. If approved, money could be borrowed by issuing eurobonds.
The report appears to be well grounded, with European leaders confirming that the four individuals are working on a plan (though they did not confirm the plan's details). The approach outlined in the report would attempt to resolve Europe's problems by increasing the Continent's political integration -- a concept that has been discussed extensively, particularly by the Germans and Europhiles. Given the circumstances, this would seem to be a reasonable position. If all of Europe is going to be responsible for sovereign debt issued by member countries, then the stakeholders who have the most invested in the European project must have control over borrowing. The moral hazard of de facto guarantees on borrowing without such controls is enormous.
