Spain is on the brink of an economic crash and bail-out because of the perversities of the eurozone banking system and the world financial markets.
The answer is to take high finance across Europe into public ownership, establish workers’ control over the sector, and run it as a public service for banking, pensions, and insurance. But the EU leaders will not do anything like that. The crisis will worsen.
Spain had a property-price boom in the run-up to the 2007-8 crash, like the USA and Britain and Ireland. At first its property prices fell much more slowly than prices in the USA (now down 33% from their 2006 Q2 high, and still falling, though more slowly than before) or even in the UK (house prices dropped 19% between 2007 Q3 and 2009 Q1, but have since levelled off).
By now, however, Spanish house prices are down over 20% from their 2007-8 peak, and falling faster and faster. It is not that a previous fast fall made an economic crisis; the economic crisis is now causing a fast fall, which in turn undermines Spain’s banks and causes worse economic crisis.
The economic crisis was not caused by public-spending profligacy by the social democrats in office in Spain in 2004-11. Spain's budget-balance record before the 2008 crash was better than Germany’s. The social-democratic government made lots of cuts after 2008 — enough to fill the city squares with protesters and lose the social democrats the 2011 general election — but the Spanish economic crisis has really gathered speed since the right-wing Popular Party won office and stepped up the cuts.
Even now, Spain’s government debt is proportionately much less than the UK's (Spain: 68.5% of GDP. UK: 85.7%). Its annual budget deficit is about the same as the UK's (Spain, 8.5% of GDP; UK, 8.3%).
The crisis is not caused by slack regulation of banks. Experts commented in 2008 that Spain had been saved from bank crashes in that year by having much better regulation of banks in the previous years than the USA or Britain had. The Bank of Spain had prevented banks from holding “special purpose vehicles” off balance sheet.
Spanish capital is caught in a loop. The frame is set by the eurozone’s odd system of central banking. The European Central Bank carries out some of the functions of a central bank, mainly control of the money supply, and exercises heavy control over the national central banks.
Other parts of the job of a central bank are done by the national central banks, notably guarantees to depositors of the country's commercial banks, the bailing-out of commercial banks in trouble, and the trading of national government IOUs (bonds).
The European Central Bank has bent the rules a bit in recent years. It has supplied cheap credit to banks through the LTRO and ELA schemes, and bought up some countries’ government bonds to limit their collapse (the SMP scheme). Those schemes have been limited and reluctant, and are currently on hold.
The Spanish government is being brought down by a vicious circle in which it uses its credit to save collapsing banks; its creditworthiness in global markets worsens; the burden on the government budget worsens; cuts increase; output falls; and the commercial banks become even worse off.
George Osborne may say that British government bonds are selling easily because of global financiers’ admiration for his ruthlessness in making cuts, but the Spanish government is now just as ruthless as Osborne, and that harms (giving signals of crisis) rather than helps.
Once financiers get worried about the Spanish government's creditworthiness, they demand higher interest rates on Spanish bonds to compensate them for the prospect that they may get a lower price for those bonds when they sell them on in a year’s or two years’ time.
Now the Spanish government can sell new bonds only by offering high “coupons” on them (interest rates as percentage of face-value: Spain is offering 5.85%), or by accepting that financiers will pay the government less than the face-value of the bonds (i.e. less than the Spanish government has to repay to the bondholders in two years’, five years’, or ten years’ time), or both. (The UK offers 4%, and gets more than the face-value of bonds). The Spanish government’s financial position worsens; and so its bond-market difficulties worsen further.
Many economists now think that Spain will soon have to resort to a “bail-out” — borrowing from the EU/ ECB/ IMF “Troika”, on penal conditions, rather than from the markets. A bail-out, in its turn, can worsen the economic spiral, as it has done in Greece.
To breaking the vicious circle, the idea of a eurozone “banking union” is gaining ground among eurozone leaders. Deposit insurance and bailing-out of commercial banks would become a responsibility of the eurozone, rather than of national central banks.
The German government and central bank, however, are stalling. Angela Merkel’s version of a “growth plan” for Europe, revealed by the German business magazine Handelsblatt on 4 June, is minimal (emphasis on “structural reforms”, i.e. on neoliberal slashing of worker-protection laws, and “stable finance”, offset only by some promises to spend from the EU budget on youth-jobs and infrastructure initiatives).
The odds must be that if Greece is forced out of the eurozone, then Spain will quickly be pushed into becoming a "second Greece", only much bigger.