Only a political suicide or national unity government can save Spain and the euro

The markets have lost faith in the Spanish economy as jobless rates and budget deficits are high, banks are wavering and households are vulnerable. The government’s reform programs have not done much to restore confidence. Perhaps last week’s €65bn package could be tipping point, but markets don’t seem convinced. Their suspicions are partly justified as the earlier programs were not implemented to a sufficient degree. That the wounds continued to fester recently forced Madrid to go cap in hand to its European partners. Obviously, prime minister Rajoy is aware situation is very precarious. Contrary to his electoral promises he has raised sales tax and announced other sweeping (and very painful) cutbacks. Two questions are very important (…..) Number 2, has Rajoy seen light and will he have enough time to effect changes? Spain’s weakening economy is badly equipped to cope with the fall-out of a fresh round of reforms and spending cuts and is at risk of going under. A more flexible job market is a good thing in the long run and same applies to a higher sales tax. However, measures to achieve this will send jobless rates higher and undermine consumption in the short run. Spain might not be able to recover from such setbacks, also because young people and those who are already vulnerable will be hit hardest. This will increase dissatisfaction and destabilize the country further yet frustration is already high. Last week’s protests and violence are a bad sign. Mr. Rajoy is caught between a rock and a hard place. On the one hand, his voters are being bled dry on all sides. At same time an impatient EU is piling on the pressure to inflict even more pain at speed. It is a difficult balancing act for Rajoy, who needs his voters to believe that he has their best interests at heart under relentless pressure from the markets and the EU. He needs to get EU off his back or he may be replaced by EU technocrats armed with a feared “Memorandum of Understanding”. When all is said and done Rajoy’s choices are limited. Either he helps to save the euro and will be voted out of office or he plays a part in blowing up euro. Yet Rajoy has not been elected on a program to do everything within his power to rescue Spain and the euro. There is only one potential way out. Eventually, he could aim for a government of national unity that is supported by unions as well as employers and sets aside all political differences. This happened in 1977 when the so-called Pact of Moncloa helped to shield Spain against a return of the military dictatorship as it contained high inflation and substantial deficits. However, if Rajoy believes he can lean back and count on his comfortable parliamentary majority and the regional governments (dominated by his party), such a pact will remain a mirage. In that case, Spain will continue to be at mercy of markets and officials of the EU, ECB, and IMF. The latter may well find that they have bitten off more than they can chew.


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Consultor Internacional

10 Responses to Only a political suicide or national unity government can save Spain and the euro

  1. Professor Uziel Nogueira says: The article gets it wrong on both accounts. First, Spain is caught up in a debt trap, the country is going insolvent. Its near future is decided by investors that are asking higher interest rates do lend additional money. Neither the PP nor the PSOE can do anything about the financial debt crisis. At this point, Spain’s financial problems are well above politicians pay grade. Second, the euro is not threatened by the Spanish debt crisis. Au contraire. The euro will get stronger if weak economies abandon the common currency. Germany made a huge political mistake in 1999 when accepted unsuitable economies to share a common currency. Greece, Portugal, Spain, Italy and Ireland are the weakest links of the euro zone. For example, a backward economy such as Greece cannot have the same currency as one of the most advanced and competitive economies in the world, Germany. Some countries, among the current 17, will eventually leave the euro. The costs of keeping the common currency will be higher than the benefits. The golden years of euro’s free ride is over.

  2. IT IS really hard to see where the euro is going. Spanish yields are up again today, meaning Madrid’s debt looks less and less sustainable. Yet there is still no clear plan for the euro, new ideas seem to have run out, and there is a lack of progress on old ideas. What is going to happen? One way to think about the euro’s future is to look at its past, and to go back to the origins of money. There are two leading schools of thought about this. The first was set out 120 years ago in a paper* by Austrian economist Karl Menger. In Menger’s theory buyers and sellers agree on a common commodity to use as the medium of exchange. Something small, valuable and divisible is best. It helps if it doesn’t rot. Gold, spices and shells are all good examples. This money is highly “saleable” so everyone accepts it, and this means that traders don’t face the costs associated with barter (the time spent having to scout around looking for the rare person that both wants what you have, and has what you want). There is no role for government here. The Mengerian theory describes a market-led response to the high transaction costs of barter, in which the private sector defines and uses money as a solution. The second theory places great emphasis on the role of government, as Charles Goodhart explains in a 1998 paper. This group—the Cartalists, who Mr Goodhart refers to as the “C team”—argue that currencies become money due to the active involvement of the state. Examples include setting up a mint to produce coins, demanding taxes are paid in state money, and stamping notes with the head of state’s image. And while the M-theory is backed by history’s superstar economists (Locke, Jevons) the C-theory has much stronger evidence based in anthropology and history.

    Why is this relevant for the euro? Here is Mr Goodhart writing in 1998, on the eve of the euro project: “The key relationship in the C team model is the centrality of the link between political sovereignty and fiscal authority on the one hand and money creation, the mint and the central bank on the other. A key fact in the proposed Euro system is that the link is to be weakened to a degree rarely, if ever, known before. … There is to be an unprecedented divorce between the main monetary and fiscal authorities … the C team analysts worry whether the divorce may not have some unforeseen side effects”.

    The logical conclusion from this is not a new idea: the euro area needs greater fiscal integration. But the reason is different. It is not because Greece and Spain spoiled a perfect plan with their profligacy. It is because the euro enshrines the divorce of fiscal and monetary power. If you are a member of Mr Goodhart’s C team this never made sense in the first place.

  3. It is a rule of thumb among eurozone crisis observers that the more something is denied by officials, the more likely it is to happen. With Spain’s borrowing costs at euro-area record highs, its officials insist it will not need a full bailout programme. To most of us, however, it seems no longer a question of if, but when a bailout will come. Market panic this week seems to suggest it is imminent, but I think it will be put off as long as possible, probably until early next year. Long-term borrowing costs may have broken an eye-watering 7.5%, but the fact that short-term borrowing costs have rocketed as well is more worrisome. This indicates a lack of investor confidence that Spain will be solvent even over the next two years (…..) Still, the Spanish government is going out of its way to avoid it. In part this is because of concerns that it will be unable to regain market access once it loses it by borrowing from the EU bailout funds. But a delay is also important to the rest of the eurozone. Though Spain may be hogging the limelight now, Italian borrowing costs are only slightly lower. Were Spain to be taken out of the markets, investors would focus on Italy, which would soon also need a bailout. It is an open question whether the EU funds and IMF have enough between them in theory to cover Spain and Italy’s needs over the next few years. What we do know, however, is that there is not in practice enough bailout money for those two countries now. The ESM has not been ratified yet and will not be implemented until September at the earliest, when the German constitutional court makes a final ruling on its legality. Furthermore, bailout money from the IMF has been pledged by individual G20 countries but is not yet in place. That leaves only about €200bn in unearmarked funds in the EFSF. The EFSF alone has no chance of covering Spain and Italy’s borrowing costs over the next few years. An immediate pledge to bail out Spain and then Italy in the absence of ESM and IMF money would lack credibility. Together, these funds are meant to be a firewall. If Spain requested a bailout now, eurozone policymakers would be left trying to protect two big countries with what amounts to a fence made of toothpicks.

  4. (…..) Another day, another set of crisis headlines — but there is a silver lining: Finally, Europeans are being forced to face up to decades’ worth of fundamentally dishonest politics. Since the 1970s, one government after the next has spent, borrowed and then inflated its way out of the subsequent debt. Then they recovered — only to spend, borrow and inflate once again. Not coincidentally, this cycle was most severe in countries with weaker democracies. Spain ceased to be a dictatorship only after Franco’s death in 1975, Greece was ruled by a military junta from 1967 to 1974, and Italy has had more than 60 governments since World War II. Successive leaders in all of those countries have tried to “buy” the electorate with elaborate pensions, state-sector employment and other perks. Banks across the continent and around the world have greedily facilitated them. Now they can’t. Though no one recognized it at the time, joining the euro was like adopting the gold standard: It meant that individual governments couldn’t inflate their way out of trouble anymore nor pass on to the next generation the bill for today’s expenditures — as they still can in the United States and Britain.

    All along, it has been a mistake to describe the euro zone’s difficulties as a “currency crisis.” In fact, it’s a political crisis, caused by an addiction to debt, and it requires a political solution. Electorates have learned the truth: They are bankrupt. Whatever decisions the European Union now makes, future recovery depends on how much of the plain facts ordinary people can bear to absorb

    (…..) This political unrest is happening after, not before, a series of bailouts, major and minor: These three nations, and their banks, have already received funding that ultimately comes from Germany, the only truly solvent member of the euro zone. They may need more help — but before that, German politicians will have to tell their electorate the truth too. Which is this: No country has made more money out of the euro than Germany; no other country has profited more from the current crisis — which has kept German borrowing rates relatively low — and no other country’s banks own more of the continent’s debt. Germans aren’t “rescuing” their neighbors out of magnanimity, as many seem to think, but out of self-interest. But does the German public know it? And do the southern Europeans understand how few options they really have? August is the traditional month for financial crises: We may be about to find out.

  5. La prima de riesgo española se ha reducido este jueves de golpe en 50 puntos básicos y ha bajado de los 600 puntos por primera vez desde el viernes gracias a la dura advertencia que ha lanzado Mario Draghi, presidente del Banco Central Europeo. “El Banco Central está dispuesto a hacer todo lo que sea necesario para preservar el euro. Y créanme, eso será suficiente”, ha advertido Draghi, cuya institución es la única con capacidad para actuar de forma inmediata si se quieren atajar las fuertes presiones que han acorralado a España en los mercados. El cambio de rumbo en la deuda ha disparado las ganancias en las Bolsas. Entre ellas, el español Ibex 35 ha subido un 6% en su mejor jornada de los últimos dos años. El resto de las Bolsas europeas también ha experimentado fuertes subidas. El Dow Jones subía cerca de un 1,5% al cierre en el Viejo Continente animado por la bonanza europea. “En la medida en que las primas de riesgo dificulten el funcionamiento de los canales de transmisión de la política monetaria, caen bajo nuestro mandato”, ha justificado Draghi, que el pasado fin de semana rechazó intervenir en los mercados en tanto en cuanto no entra en las competencias del BCE sustituir a la política financiera de los países. Traducido: deben seguir con los ajustes y las reformas, sobre todo España, cuya actuación hasta la fecha en materia presupuestaria y de reducción del déficit ha generado los recelos en el seno del eurobanco (…..)

  6. (Autoria) Comentario del Prof. Uziel Nogueira: En su tiempo, Alan Greenspan — presidente de la FED — también movía los mercados financieros y bursátil con expresiones enigmáticas como exuberancia irracional. Ahora le toca a Mario Draghi, presidente del ECB, hacer uso del poder de sus palabras para mover el mercado bursátil y financiero durante el auge de la crisis de deuda. Pero, que quiere decir, exactamente, Mario Draghi cuando dice : ” El Banco Central está dispuesto a hacer todo lo que sea necesario para preservar el euro. Y créanme, eso será suficiente. ” Hay dos maneras de interpretar sus palabras. La visión optimista. El BCE estaría dispuesto a comprar papeles de la deuda española y italiana a tasas de interés mas sostenibles. La visión pesimista. El BCE no ira permitir una desintegración de la moneda común. Esto no significa, necesariamente, que el BCE ira salvar las economías española y italiana de un debacle a la griega. En las próximas 48 horas, la respuesta sera dada por los inversores. Según un dicho de los judíos portenos, el pesimista nunca se equivoca.

  7. O BCE pode intervir, mas será que chegarão a tempo ??

    (…..) Dans le cas espagnol, cette voie restait fermée du fait d’une incertitude «systémique» sur la santé des banques. La signature officielle, mardi, du plan de recapitalisation et le feu vert définitif de la Commission mercredi ont opportunément levé l’obstacle. «Rien ne s’oppose plus à ce que Madrid demande au FESF d’entrer en lice sur les marchés», confirme un responsable au fait du dossier. Le fonds de sauvetage pourrait surtout entraîner dans son sillage la BCE, rempart de l’euro, dont la crédibilité reste intacte. C’est en effet à la banque centrale que revient le rôle de recommander l’intervention du FESF, l’Eurogroupe donnant ensuite un feu vert politique à l’unanimité. La BCE se trouverait de facto liée par l’avis rendu, poursuit-on de source européenne. Pour finir, un soutien du FESF sur les obligations permettrait à la BCE de revenir sur le marché secondaire et d’acheter à son tour à moindre risque.

  8. (…..) It looks like Draghi finally found that panic button. This is crucial, as the ECB is the only institution that can bring sufficient firepower to the table in a timely fashion. His specific reference to the disruption in policy transmission appears to be a clear signal that the ECB will resume purchases of periphery debt, presumably that of Spain and possibly Italy. The ECB will – rightly, in my opinion – justify the purchases as easing financial conditions not monetizing deficit spending. So far, so good. But there is enough in these statements to leave me very unsettled. First, the claim that the Euro is “irreversible” should send a shiver down everyone’s backs. Sounds just a little too much like “the crisis is contained to subprime” and “Spain will not need a bailout.” Second, the bluster that “believe me, it will be enough” is suspect. The ECB always thinks they have done enough, but so far this has not been the case. Moreover, he is setting some pretty high expectations, and had better be prepared to meet them with something more than half-hearted bond purchases. Also, note that despite Draghi’s bluster, the rally in Spanish debt send yields just barely below the 7% mark. A step in the right direction, but also a signal that investors still worry that Spain will need a bailout despite additional ECB action. More distressing to me was Draghi’s clearly defiant tone, reminiscent of comments earlier this week from German Finance Minister Wolfgang Schäuble.The message is that Europe has done all the right things, it is financial market participants that are doing the wrong things. What we have here is a failure to communicate. European leaders believe they have made remarkable progress in the context of the political realities they face, and want credit for that expended “political capital.” Financial markets are saying the the progress politicians see as “remarkable” barely moves the needle compared to what is necessary to resolve the crisis (…..) Bottom Line: Draghi has his back up against the wall, and is now forced to step back into the crisis. A near-term positive, to be sure. It might be a longer-term positive if the ECB would commit to an open-ended purchase program based on macroeconomic objectives (sound familar?). But that is likely too much to ask, as he has yet to admit that the entire policy approach is failing the Eurozone, not just in the short-run, but in the long-run as well. Until policymakers fundamentally rethink their approach to the crisis, expect the optimisim-pessimism cycle to continue. Right now, the best case scenario I see is that the ECB will act to hold the Eurozone largely together, but at the cost of protracted recession.

  9. Last week Mario Draghi, the president of the European Central Bank, declared that his institution “is ready to do whatever it takes to preserve the euro” — and markets celebrated. In particular, interest rates on Spanish bonds fell sharply, and stock markets soared everywhere. But will the euro really be saved? That remains very much in doubt. First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.” But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.” Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country. Consider, for example, the comparison between Spain and Florida. Both had huge housing bubbles followed by dramatic crashes. But Spain is in crisis in a way Florida isn’t. Why? Because when the slump hit, Florida could count on Washington to keep paying for Social Security and Medicare, to guarantee the solvency of its banks, to provide emergency aid to its unemployed, and more. Spain had no such safety net, and in the long run, that has to be fixed. But the creation of a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what can be done to save the currency? (…..)

  10. Professor Uziel Nogueira says: The common currency will be saved. The question is HOW it will be saved. PK formula for salvation i.e., ECB buying public debt and Germany accepting higher inflation rates is NOT in the cards. PK formula is a theoretical academic solution that — as in many situations of the real world — is politically and economically unworkable. For the highly indebted countries — Greece being the primary example — the euro is no longer a solution but a problem.

    A small number of countries sharing the common currency is the inevitable outcome of the current debt crisis.

    The euro zone resembles a platoon of army rangers behind enemy lines. Some members of the elite fighting force cannot keep up with the pace and intensity of the engagement. The platoon leader has to make a tough decision. Either save the stragglers of his team or accomplish the mission. In the case of euro zone, the mission leader will to whatever it takes to accomplish the primary goal or die in trying it.

    To think otherwise, is wishful thinking of people not schooled on Germany’s history and culture.


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