Spain's bailout won't cure euro crisis

The Spanish government announced on Saturday 9 June that it would seek a financial bailout from the European Union.

Previously, for months, it had said that it had everything under control and there was no question of a bailout.

Eurozone finance ministers quickly said they’d lend up to 100 billion euros to the Spanish government to enable it to patch up dodgy banks.

Although Spain’s budget-balance record was better than Germany’s before 2007, and Spain’s bank regulation was applauded in 2008 as exceptionally good, Spanish banks have eventually been brought down by the collapse of real-estate prices in Spain.

Spain had a house-price boom before 2007 similar to the USA’s, Britain’s, and Ireland’s, but its real-estate prices at first dropped much more slowly. Now they are plummeting. Big cuts in social spending are producing a downturn in Spanish employment and income, which in turn undercuts property prices.

The bailout will scarcely even alleviate this interlocking death-spiral.

Economist Megan Greene comments: “In the absence of economic growth, a bailout for Spain’s banks will be followed by a bailout for the sovereign as well”.

Spain has cajoled EU leaders into declaring that this bailout will come with much easier conditions on the Spanish government than imposed on Greece, Ireland, and Portugal.

By demonstrating that the conditions are a matter of political choice, not of economic iron law, this result can only encourage activists in those other countries who are resisting the destructive “bailout” terms imposed on them.

The excuses are that Spanish government is already cutting ferociously, so they don’t need to impose Greece-type conditions; that the bailout cash is coming from a special fund, either the European Financial Stability Facility set up in May 2010 or its successor, the European Solidarity Mechanism; and that it goes only to Spain’s banks (via the Spanish government), not to the government to cover its own debt payments.

All these are thin, though they do show that the EU leaders have become anxious to convince global financiers that this bailout, unlike previous ones, will be generous and not destructive.

Yet Greene comments: “EFSF/ESM money for Spanish banks is unlikely to succeed in avoiding a bank run, however. Depositors in the EZ periphery are withdrawing their money from banks over concerns about their countries leaving the EZ and their savings being redenominated and devalued away.

“A bailout for Spanish banks is very unlikely to allay these concerns”.