Spain on the brink: time to agree the euro is deeply flawed
If Spain tips over the edge, even the eurozone's blinkered elite must see that change is needed
IT IS less than a month since Greece's second massive bailout and already the euro is heading back into turmoil. The deal with Athens, coming in the wake of the injection of a trillion euros into the continent's increasingly wobbly banks by the European Central Bank, was supposed to herald a period of calm. But the ECB's cheap money bought less time than expected, and may even have made the problem worse.
Now the Greeks have called an election for 6 May which could well result in a fractious and uncontrollable hung parliament. Even more ominous is that, in the meantime, the attention of the financial markets has moved on to Spain.
Bailing out Greece and Ireland was hardly a piece of cake, but at least the sums involved were manageable. Just as important was that neither was in a position to object to the terms imposed on them by their German-led creditors. Rescuing Spain would be a much more difficult proposition, both economically and politically.
With the fifth largest economy in Europe, the mantra has always been that the country is too big to fail. But with unemployment approaching 25 per cent and the interest rate on its borrowings reaching unsustainable levels, the markets have begun to wonder if it may instead be too big to save.
It may also be too big to be brought to heel by mighty Germany, in the way Greece and Ireland were. As was pointed out in this column last month, one of the new Spanish Prime Minister's first acts was to make it clear that he, and not the EU, would decide how far and how fast its austerity programme will go.
Now many Spanish economists and commentators are openly arguing that the euro was flawed from the start, and questioning whether they should even try to remain in it.
As the eurozone is belatedly discovering, countries in difficulty cannot be treated as if they are bankrupt companies. Greece has effectively been put into administration by its euro partners. New management has been sent in to safeguard the creditors' interest and get as much of their money back as possible. But it is not working and there is no good reason to think it will.
At least if Spain has to be bailed out, it will be too big and important for such an approach. Whether this might finally force the eurozone's leaders to acknowledge that the single currency's woes stem from its flawed design, rather than adverse circumstances, is hard to say. But at some point they will surely have to accept as much.
Only then will it be possible to break a whole string of taboos. Not the least of them will be whether the eurozone should even attempt to carry on in its current form.
This could mean moving more quickly towards a fully-fledged transfer union, which would leave the solvent paying more to the rest for a long time to come. Alternatively the ECB could be allowed to engage in large-scale quantitative easing, rather than the partial back-door variety permitted so far, leading eventually perhaps to some form of debt forgiveness. Or, and probably more realistically in terms of the politics involved, the eurozone could go for some mixture of the two.
On the other hand if the euro is not going to continue as it is, the countries that use it need to start considering urgently how this might be managed in the least disruptive way possible. Inevitably the process would be painful and expensive. But at least a smaller euro, probably confined to northern Europe, should make sense as a currency. That is more than can be said for the current arrangement.
The euro has become one of the biggest problems – possibly even the biggest of all - facing the entire world economy. Yet its demise has been predicted so often that any sensible commentator has to be cautious about whether or not it can survive.
None of the options for either preserving or dismantling it are remotely palatable, particularly to Germany. For many of Europe's leaders accepting any of them would represent a huge humiliation.
But should Spain tip over the edge, and especially if Greece goes into political meltdown at the same time, even the eurozone's blinkered elite will no longer be able to deny that their project needs not just a tweak here or there, but a fundamental rethink. It is either that, or chaos.