The euro The flight from Spain
Spain can be shored up for a while; but its woes contain an alarming lesson for the entire euro zone
THE worst nightmares are the ones you cannot wake up from. Just ask Spain. A year ago the cost of Spanish government borrowing soared as euro contagion spread from Greece, Ireland and Portugal. Panic seemed to subside with central-bank intervention and the promise of a new reforming government in Madrid. Since then Spain has, broadly, been as good as its word and Mariano Rajoy’s government has, played its part in countless “make-orbreak” summits in Brussels and secured up to €100 billion ($121 billion) to prop up its banks. Yet despite all its efforts and pain, Spain cannot shake off that sense of doom. On July 25th the yield on ten-year bonds touched a euro-era record of 7.75%. Two-year bonds have climbed above 7%: investors fear that Spain must soon ask for a bail-out—or default.
Spain’s nightmare is a symptom of what is wrong with the entire euro zone. As the months drag on, the crisis is deepening. Europe’s leaders have asked the world to trust that they will do what it takes to save the euro. They have also pleaded for more time to sort out the mess. Their task is indeed immense, but as they disappear to their chateaux and beach villas, trust is draining away and time is not their friend.
The bull and the horns
Spain’s situation today is all the more shocking because only this month it had announced €65 billion of tax rises and spending cuts and won the funds for its bank rescue. This was meant to persuade investors that the whole euro zone is serious about keeping Spain. Yet the message was obliterated by news that the government now expects the recession to last into 2013 and, worse, that it will have to find the money to bail out regions which have suddenly confessed to being broke.
The prognosis for Spain is bleak. The economy is in recession, the public sector is cutting spending and the private sector is reluctant to invest. This lack of domestic demand almost guarantees that Mr Rajoy will fail to meet the target to reduce the deficit. If that happens Spain will be asked to impose yet more austerity. That will undermine his popularity, which has already fallen steeply since he was elected. Spain’s resolve will be further damaged by rows over budget cuts between Madrid and regional politicians, who control 40% of public spending—and who, even if they are from Mr Rajoy’s party, jealously guard their autonomy. Political uncertainty will feed back into the economy, which will only deteriorate more. And the vicious circle continues.
Jul 28th 2012 / www.economist.com
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