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. The ECB, in other words, forced Spain (and Ireland and Portugal and Greece) to pursue a pro-cyclical monetary policy. You can see the results all over the peninsula in the unsold apartments and unfinished construction projects.
There are few things more irritating than someone being wise during the event, but it’s worth pointing out that opponents of the euro predicted this outcome quite specifically. In 1998, in ‘The Euro — Bad for Business’, jointly authored with Mark Reckless, now the MP for Rochester, I argued that the ECB could hardly fail to set monetary policy for the eurozone as a whole, which ‘will give peripheral members a double-dose of what they don’t need: low interest rates’.
I cite this prediction not to be a smart-aleck, but because the officials responsible for the disaster are addressing it with more of what caused it in the first place. Spain is in this mess because of artificially cheap credit. Yet the only solution offered by Brussels is more artificially cheap credit.
Unsurprisingly, it isn’t working. When EU leaders announced that they were bailing out Spanish banks to the tune of €100 billion, the immediate result was that Spain was downgraded three points by the credit rating agencies and its government’s borrowing costs shot up. Other than adding €15,000 to the debt of every household in Spain, the bailout had no effect whatever. So what do EU leaders propose now? Why, a bigger bailout.
The country is being run around the needs of its bad banks. The Spanish government must borrow at 7 per cent in order to shore up banks which can borrow from the ECB at 1 per cent, so that they can lend the money back to the Spanish government at 7 per cent so that it can bail them out.
What is the alternative? Rather than treating a debt crisis with more debt, Spain should default, decouple and devalue, pricing its way back into the market and exporting its way to growth. No one says that such a course will be easy — I’m afraid there are no easy options for a country in Spain’s position — but it is plainly less calamitous than carrying on with the present recession, which has left one person in four out of work.
Yet, however bad things get, most Spaniards insist on seeing Europe as the solution rather than the problem. Two thirds of them say that they want to keep the euro at any cost. I suppose it has to do with their history. When British Euro-enthusiasts try to frighten us with the prospect of isolation, they sound silly: ours has always been a global nation, connected to every continent. But Spaniards over a certain age know exactly what it means to be outside the comity of nations. The EU accession process happened to coincide with Spain’s transition to democracy, and the word ‘Europe’ consequently became freighted with all manner of positive associations: political pluralism, consumer choice, foreign pop music, easier travel, better television.
Dissent is found only on the extreme left. Anarchists and communists — it’s not often one gets the chance to write this — have been proved right. They always said that the euro would benefit plutocrats at the expense of working people, and so it has proved.
In the chamber of the European parliament, I’ve recently taken to attacking the bailout racket in Spanish. When an interpreter friend hinted, very politely, that I was creating extra work for his colleagues, I replied: ‘I’ll stop the day a mainstream Spanish politician — just one — contemplates a future outside the euro.’ I’m still waiting.
Spain’s best hope is that the finance ministers of northern Europe baulk at the colossal sums now being mooted: €400 billion, the current estimate, would drain the bailout fund. Voters in the core eurozone states grumble that they are robbing Pieter to pay Paulo. But it’s Paulo who is suffering.
Daniel Hannan is a Conservative MEP.