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Eurozone crisis: Spain « Previous | |Next »
June 9, 2012

The Eurocrisis continues to deepen---it actually grows worse by the week as the bond market continues to yank Europe’s chain. In Greece, the problem is an insolvent government bringing down the banks. In Spain, the problem is now insolvent banks bringing down the government.

The latest episode is that dodgy Spanish banks now need bailing out. The politics of austerity have seen Spain enter a double-dip recession, 4.7 million people unemployed, unemployment at 24%, a million unsold properties; hundreds of housing developments left unfinished by construction companies and real estate promoters,

RowsonMSpain.jpg Martin Rowson

The cause is a real estate boom that began in the 1998 and ended in 2007---Ponzi Growth. Robert Tornabell in The Guardian says that the consequences of the speculation in real estate are that:

Banks have now discovered that their balance sheets were filled with non-performing loans and toxic assets: urban land, unfinished housing developments, unpaid real estate loans to developers, and so on.The total assets of Spain's banking system amount to about €3tn.

The Spanish government does not have enough funds for a tough restructuring or a bailout to cover the "toxic" assets left over from a burst housing bubble.

There is a fundamental restructuring in Europe.It looks increasingly likely that the troika is moving toward a plan to combine much of Europe’s bad debt into a single fund with the idea of paying it off over 25 years. Is this the first step on a new path forward for the union, one that encompasses fiscal integration, Europe-wide banking supervision, and tighter coordination of economic policies?

A more immediate question is: will Germany allow the periphery to collapse and exit or will Germany try to save the euro? Saving the euro means greater integration in the form of a federalised eurozone. This means a eurozone banking union, which would take on responsibility for propping up failing banks and guarantee depositors' savings across the 17 countries, backed by the financial strength of Germany. The price to be paid is for eurozone governments to surrender sovereignty over their budgets and fiscal policies to a central eurozone authority.

The most likely scenario is that the ECB will reluctantly and haltingly provide funds to other nations – eg., Spain---an on-again, off-again pattern of support — and that simply won’t be enough to stabilize the situation.Then there will be the capital flight from Spain to the German banks. Meanwhile the periphery suffers ever deeper recessions — failing to meet targets set by the troika — and their public debt burdens will become ever more unaffordable.

How far will Germany go to pay for the looming bill to bail out their euro partners?The politics of austerity is now generating miserable unemployment and deep recessions in Ireland, Italy, Greece, Portugal and Spain.

Update
If Germany yields to the pressure from France to pay to save the euro, then Berlin will insist on major steps towards a eurozone federation or political union with budgetary, fiscal, and scrutiny powers vested in Brussels and in the European Court of Justice. That means vast transfers of sovereignty from member states. It's a shift to federalism.

| Posted by Gary Sauer-Thompson at 10:32 AM | | Comments (11)
Comments

Comments

No doubt conservatives everywhere will continue to maintain that it's all the fault of the damn liberals in the USA and the way they forced banks to make bad housing loans, and the only cure is a bit more austerity. I mean it's working in Estonia, what more evidence do you need?

(I read an American imbecile right winger yesterday claiming that Australia was another example of 'austerity working'. Someone should tell Abbott.)

Yet another country where the people voted conservative, surely in many cases understanding what this would mean either for themselves or the fellows.
Either that, or they were too lazy or lacked the cognitive equipment to sift through the news.
It seems typical of the timid response of electorates to ongoing reality as it emerges.
If you add the docile response to the GFC to ninny politics on race, gender, class etc, it's an unattractive mirror to hold up, if it shows you what you are like in your cups also, as a fellow member of the species.

Spain has had to go cap in hand to Brussels and ask for a loan to help bail out its wrecked banks.

The cheap loans for Spanish banks from the European Financial Stability Facility (EFSF) come with soft conditions buy the banks time. However, Spain cannot afford to fund its debt at 10-year interest rates of 6.5%.

That means the Spanish government will have to seek its own bailout.

The countries at the heart of the euro crisis can no longer access capital to finance their trade deficits. At the same time, capital is fleeing their economies in search of a safe haven.

Many commentators say that Gillard just fails to cut through on carbon pricing. it gains her no traction with voters

"The cause is a real estate boom that began in the 1998 and ended in 2007---Ponzi Growth. "

Spain spent years going full-speed down a highway to prosperity based on low inflation, cheap money and shovelling cash to property developers – only to discover too late that it was a dead-end street.

The property bubble built on debt and speculation burst.

"Saving the euro means greater integration in the form of a federalised eurozone."

The next step is for a form of eurobond whereby Germany and other smaller creditor countries guarantee the debts of the struggling member states.

Germany is taking responsibility for solving Spain's banking problem without having any control over the Spanish banking system.

I watched a really awful 4 Corners documentary (recycled from the BBC) about the Eurocrunch on Monday (11/6/12). It strongly implied Spain's troubles arose from irresponsible Govt. spending. Paul Krugman has debunked this idea several times, yet zombie-like it continues to shuffle around. It's sad that the ABC showed such a flawed piece of reporting.

http://krugman.blogs.nytimes.com/2010/02/05/the-spanish-tragedy/

gordon,
I watched it too--well the early bit. I tossed it in because it was full of British euro-sceptic's pronouncements on European federalism. I thought that it was crap.