The first step in salvaging the euro has to be an immediate and robust ECB intervention
Despite the bank bailout, Spain is inching toward a situation of insolvency that would necessitate an economic intervention. After Moody’s lowered the debt rating three notches from A3 to Baa3, just one above junk-bond status, the risk premium rose to 552 basis points on Thursday, while the benchmark 10-year bond reached 6.998 percent, on the verge of becoming an unsustainable financial burden. Spain’s solvency is on the slippery slope that leads to a full-scale bailout. The markets’ asphyxiating pressure leaves almost no room for political or economic maneuver on the part of the government in Madrid or the European authorities.
The government is responsible for this situation. Prime Minister Mariano Rajoy and his economic team have managed the banking crisis recklessly: they let the Bankia situation deteriorate and turned a case of possible bankruptcy into a standoff with Brussels, the ECB and the IMF. Now they have irritated their European colleagues with a bout of denial over the reality of the bank bailout by attempting to pass it off as a cheap loan with no strings. It is hard to ask decision-makers and investors to place their trust in a government that is incapable of communicating Spain’s delicate situation to its citizens, one that tends to mask reality and gives the impression that it is not fully aware of the consequences of the European intervention in Spain’s stricken financial system.
But it is Europe that must bear an even heavier duty in this crisis. All the diagnoses have been made and the remedies known — but the euro zone has not been able to accept or apply them. Germany has barricaded itself behind its demands for austerity on the part of the group of countries deemed suspicious (Greece, Portugal, Ireland, Spain and Italy), which have the effect of deepening recession and provoking social conflicts. Greece’s raging political crisis can only be understood if you take on board the onerous conditions imposed by Europe (Germany, that is) in return for the bailout, besides the poor economic management of the country’s governments.
The European Council meeting on June 28 will be decisive to see if the single currency really has a future or if it is doomed to a rapid downfall due to the potential bankruptcies of Spain and Italy. This disaster would have been caused by the lack of an effective response from Europe’s leaders in the midst of a financial crisis that is contaminating the whole world.
If the same old promises for the future (greater fiscal union and remnants of structural funds to fuel an illusory recovery) come out of that meeting, the euro has little future. Not that Europe has no need for greater fiscal harmony, nor that a banking union should be renounced as an objective; but these are medium-term aims and the euro’s survival is a fight that is taking place here and now.
The first thing the ECB must do is buy up debt to safeguard the solvency of the countries at risk of being intervened while the terms of Spain’s bank bailout are being hammered out. The second step required is a new round of banking finance for the longer term. Spain and Italy need an extended cooling-off period from their financial stresses. Once these two decisions have been taken, it will be possible to move on to the structural plans, such as fiscal and banking union.