The crisis of the European Union’s common currency goes into its second act, replete with a Spanish fandango as the curtain rises with the biggest peripheral Euro player downstage. Spain’s economy is almost twice as large as the combined early crisis victims – Greece and Ireland and waiting in the wings, Portugal. As the world’s No. 9 national economy, it is 10% of all Eurozone activity. And Madrid’s problems caricature the political issues dogging all the 27 EU members. They promise an endemic crisis.
As with all Europe, Spain is torn by internal rivalries as old as the nation state itself. Spaniards have always spoken of Las Españas – the Spains – acknowledging and rationalizing these differences. The divisions are more than regional geography but language, custom and legalities from before the modern era with important economic implications. The Chartered Community of Navarre, for example, one of Spain’s Basque-speaking political subdivisions, even has its own special tax arrangements dating from its inclusion in a united Spain in 1515.
Because the European Union was a top down construction – the creation of statesmen looking for a way out of centuries of warfare to permanent stability and prosperity – it has, as a byproduct, fed these differences. Like other European countries’ autonomous zones – including even highly centralized France – Spain’s regions increasingly see themselves as EU partners rather than nation state components. As more power has been seized by unelected Brussels Eurocrats – Europe’s parliament is a powerless figurehead where discredited politicians go to die – Madrid’s hold on its constituencies weakens. Separatism was fed, too, by subsidies [€347 billion in the last five years] from Brussels targeted at backward EU areas, revealed in the light of the new austerity as corrupt [along with huge agricultural subsidies].
As the economic crisis deepened, last month’s elections in Catalonia – which with the Basque Countries had per capita income a third higher than the national Spanish average — produced a majority advocating either more autonomy or independence. Ironically, Prime Minister José Luis Rodríguez Zapatero’s minority Socialist government has hung on by swapping autonomy concessions for the support of ethnic nationality parties in Madrid’s Cortes [parliament]. That’s despite their otherwise social and economic conservatism. That collaboration is ending with the economic strains.
For in addition to its central debt, Madrid has to deal with the autonomous governments having borrowed heavily. With their industry sparking Spain’s remarkable two decades of progress, they now are suffering the highest unemployment. That is going to further complicate Mr. Zapatero’s austerity program aimed at funding Spain’s debts. He proposes reducing deficits from €45 billion to €30 billion next year. A Socialist leader has gone to such lengths as advocating privatizing the world’s oldest lottery and other state-owned enterprises. But in the face of 20% unemployment, his core constituency, the trade unions, demand strengthening rather than dismantling generous unemployment benefits and protective labor legislation, a major impediment to growing the economy out of debt.
In fact, growth is stalling in the 16 countries using the Euro, even in Germany, and actually negative in the basket cases of Greece and Ireland, in part because of their very austerity programs. It’s hitting Spain, too, faced with rising debt refunding rates — up 20% in the last two months.
Attempting to come to the rescue, the EC’s central bank has been playing cat and mouse with the markets since May, occasionally sneakily buying up €67 billion worth of governments’ bonds to reduce interest rates. But it’s nothing like the €2 trillion or so which would be needed to mop up “the Club Med debt”. Berlin, with its historic fear of cheap money and inflation, adamantly opposes imitating the “quantitative easing” pursued by the U.S. Fed — printing Euros. In fact, German Chancellor Angela Merkel’s proposals for setting up contingencies for coming “bailouts” has only added to investors’ jitters and run up the price of refunding.
A growing number of critics hold that “bailouts”, in any case, are not the solution since they only kick the ball down the road. They argue the remedy has to be “restructuring”, default under which bondholders take their lumps. But as indicated by recent revelations of the massive extent to which the U.S. Fed came to the rescue of European banks in 2007-08, those kinds of losses for the banking system could bring on a whole new round of international financial crisis. The European central bank is already extending “emergency” loans to some European banks including the Spanish caja, savings banks.
This rats’ nest increasingly suggests dismantling the Euro may be the only way out, but something Mrs. Merkel has said is unthinkable because it is so emblematic of the European Union itself. Furthermore, a specter down the road for Germany, the powerhouse of the EU as the world’s largest economic entity, is a return to a neodeutschemark would bring speculators running, driving up German prices, possibly creating inflation – and threatening Berlin’s huge dependence on exports, the motor of its post-WWII prosperity.