Spain teeters on euro brink, but is it too big for Germany to bully?
After cowing Portugal, Greece and Ireland, Germany has finally met its match in its game of euro debt crisis chicken
WITH SPAIN on the brink of a bond and banking crisis, are we finally about to see the major explosion in the Eurozone we have all been waiting for?
Over the last two years, whenever the situation in Greece or Ireland or Portugal has reached breaking point, a fudge has been found to tide them over. But Spain is much bigger, meaning its problems are that much larger too. Rescuing it could, by some estimates, require €300 billion. That alone would go a long way towards exhausting the new European Stability Fund, before it has even been properly set up.
Paradoxically, rather than weakening Spain’s hand, this probably strengthens it. Back in April, when the weakness of its banks first became apparent, I wrote in this column that not only might the country 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”.
This is the drama that is now being played out. Both sides understand that there is going to have to be some form of bailout. But as the crisis has deepened, the stand-off between Madrid and Berlin over the terms has grown increasingly tense.
Unlike Greece, demands for more austerity are not the sticking point. With unemployment nudging 25 per cent and retail sales down a shocking ten per cent over the last year, all sides can see that for Spain to tighten much faster now would be self-defeating.
The European Commission has even suggested that the country might ease up on its current austerity programme. In Brussels’ view it would be acceptable for it to reach the EU-mandated three per cent deficit limit in three years rather than two, as Madrid is aiming to do.
But what is not acceptable, to either Brussels or Berlin, is the insistence of the Spanish prime minister, Mariano Rajoy that he will not accept supervision by the so-called troika of the IMF, the European Commission and the European Central Bank, as the price of any bailout. Equally unacceptable is Rajoy’s suggestion that the ECB should simply pump in more money, either directly into the banking system, or to the treasury in Madrid via quantitative easing.
Throughout the euro crisis, it is the Germans who have been portrayed as the intransigent party. But it is often forgotten that the euro is not the only botched currency union they have had to pay for in recent decades. In 1990, when the Deutschmark absorbed the Ostmark as part of the process of German reunification, the generous rate at which the deal was done caused the collapse of much of the East German economy.
The bills for this saga, nearly €1.5 trillion to date, are still coming in, so German aversion to the prospect of yet more euro bailouts is understandable. It is also the case that their politicians and business leaders, at least, do now seem to accept that they will have to do more if they want to save the euro, even if their population does not agree.
But with the entire world looking to Germany to avert a eurozone meltdown, Berlin still seems unable to grasp that time is not on its side. While everyone else is talking in terms of months, the Germans are still thinking in years. Equally worrying is the absence of a credible Plan B for countries to leave the euro if they can no longer cope.
Against this unnerving backdrop, the question on everyone’s minds this week is who will blink first, Spain or Germany? But there is a third party in this drama. Were the ECB to defy Berlin and pump money directly into Spain’s banks, or take a leap and begin quantitative easing on a meaningful scale, Germany would be outraged. Faced with outright disaster, however, its Italian president, Mario Draghi, might consider that a price worth paying to save the single currency.
In a situation as tense as this, one should never discount the risk of accidents – particularly while Greece remains in the picture. But some form of action from the ECB, combined perhaps with some new undertakings from Spain, would at least avoid an explosion.
Don’t be surprised if, at the eleventh hour, all three parties, Spain, Germany and the ECB, blink together. If there is a fudge available, even if it will only buy a few more months, everything we have learnt about the eurozone suggests that is what it will go for.