Daniel Hannan

The pain in Spain

Nowhere has the euro done more damage. But Spanish politicians will never say that

Spain was always going to be where the doom of the euro would be determined. Ireland, Portugal, Greece and Cyprus amount, together, to less than 5 per cent of the EU’s economy. They can be rescued without emptying the bailout fund. Alternatively, their defaults can be managed as controlled explosions.

Spain is in a different category. Europe’s banks are massively exposed there: an explosion could blast the continent’s financial system to splinters. On the other hand, the sheer scale of a rescue package might finally exhaust the patience of the northern European taxpayers.

Spain’s agonies were caused directly by the euro. We can’t, as we can in Greece, blame irresponsible local politicians or poor tax collection. Spain was running a surplus going into the crash, and had reduced its national debt to 42 per cent of GDP. To be sure, José Luis Zapatero’s Socialist government made mistakes, but it never went in for anything like Gordon Brown’s demented ­incontinence.

No, Spain’s problem, like Ireland’s, was that its needs were out of synch with Europe’s. When an economy is overheating, the standard response is to raise interest rates. Economists call this ‘counter-cyclical monetary policy’, meaning that it will even out the boom-and-bust cycle. The trouble was that, as a member of the euro, Spain had no interest rates of its own. Instead, it had to apply the interest rate set by the European Central Bank — which was, of course, set according to the needs of the eurozone as a whole. In retrospect, we might argue that the rate was too low even for Germany and its satellite economies. What is beyond question is that, for Spain, it was catastrophic. During the decade leading up to the 2008 crash, real interest rates in Spain averaged minus 2 per cent.

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