ANALYSIS/OPINION:
The drama of the European Union’s common currency now goes into its second act, replete with a Spanish fandango as the crisis expands. Spain’s economy is almost twice as large as those of the first victims of the crisis — Greece and Ireland. As the world’s ninth largest economy, Spain represents one-tenth of all eurozone activity. And Madrid’s problems are a microcosm of the political issues dogging all 27 EU members. Those issues portend an endemic crisis.
Like so many of its EU partners, Spain is torn by internal rivalries as old as the nation-state itself. Spaniards have always spoken of “Las Espanas” — plural — acknowledging and rationalizing these differences. The divisions are more than regional geography, with differing languages, customs and legalities dating from before the modern era bringing important economic implications. Navarre, for example, one of Spain’s Basque-speaking political subdivisions, has its own special tax arrangements dating from its inclusion in a united Spain in 1515.
Because the EU was a top-down construction — the creation of statesmen looking for a way out of centuries of warfare — it has, as a byproduct, fed these differences. Spain’s regions increasingly see themselves as EU partners rather than components of a single nation-state. As more power has been seized by unelected Brussels Eurocrats — Europe’s parliament is a powerless talking shop where discredited politicians go to die — Madrid’s hold on its constituencies weakens. Separatism was fed, too, by subsidies ($461 billion in the past five years) from Brussels, which targeted backward EU areas.
As the economic crisis deepened, last month’s elections in Catalonia — which with the Basque regions had a per-capita income a third higher than the national Spanish average — produced a majority advocating either more autonomy or independence.
Ironically, Prime Minister Jose Luis Rodriguez Zapatero’s minority socialist government has hung on by swapping concessions of autonomy for the support of ethnic nationality parties in the Cortes, the Spanish parliament. That collaboration is ending with the economic strains.
In addition to its central government debt, Madrid has to deal with heavy borrowing by the autonomous governments. Their industry sparked Spain’s remarkable two decades of progress, but they now are suffering the country’s highest unemployment levels. That is going to further complicate Mr. Zapatero’s austerity program aimed at funding Spain’s debts. He proposes reducing deficits by a third to $40 billion next year. The 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 percent unemployment, his core constituency, the trade unions, demand even more generous unemployment benefits and protective labor legislation, a major impediment to getting the economy out of debt.
In fact, growth is stalling in the 16 countries using the euro, even in Germany, and is 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 rates to refinance its existing national debt — up 20 percent in the past two months.
Attempting to come to the rescue, the EU central bank has been playing cat-and-mouse with the markets since May, stealthily buying up nearly $90 billion worth of government bonds to reduce interest rates. But it’s nothing like the $2.6 trillion or so that 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 contingency funds for coming “bailouts” have only added to investors’ jitters and run up the price of refunding.
A growing number of critics hold that, in any case, “bailouts” are not the solution since they only kick the ball down the road. They argue the remedy has to be “restructuring,” a default in which bondholders take their lumps. But those kinds of losses for the banking system could bring on a whole new round of international financial crises. The European central bank is already extending “emergency” loans to some European banks, including the Spanish savings banks.
This rats’ nest increasingly suggests dismantling the euro may be the only way out, something Mrs. Merkel herself has said is unthinkable because it is so closely tied to the success of the EU itself. Furthermore, a specter down the road for Berlin, the economic powerhouse of the continental alliance, is a return to the old German mark, a radical step that would bring speculators running, drive up German prices, possibly spark a new round of inflation — and threaten Germany’s huge dependence on export-led growth, the motor of its post-World War II prosperity.
• Sol Sanders, veteran foreign correspondent and analyst, writes weekly on the convergence of international politics, business and economics. He can be reached at solsanders@cox.net.
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