It may be a holiday weekend in the United States and much of Europe (where the Monday after the feast of Pentecost is often celebrated as a holiday), but the world’s politicians, central bankers and financiers are too busy quaking in their boots to bask in the sun.
The problem is Spain, which dropped two stink bombs on the world. First, the cost of bailing out just one of Spain’s many doomstriken banks shot up from €4.5 billion ($5.6 billion) to €23.5 billion ($29.5 billion). This is money that Spain’s cash strapped government doesn’t really have; it is under orders from Brussels to reduce its budget deficits and has already slashed spending even as youth unemployment hits a Detroit-level 50 percent. This news isn’t just bad in itself; it means that the other zombie banks in Spain (and there are plenty of them) are going to be much, much more expensive to rescue than previously believed.
The other piece of bad news is potentially even worse. This came in the form of a statement of the president of Catalonia that his regional government is running out of money and needs a bail out of its own. Catalonia, a region in northeastern Spain which speaks its own language and hosts an independence movement, is as the FT notes bigger than Portugal in terms of GDP and accounts for one fifth of Spain’s economic activity.
Why has this piece of bad news terrified global elites? In the first place because it demonstrates that in addition to huge costs in bailing out its banking sector the insolvent Spanish central government is going to get hit with massive bills from not only Catalonia but its other regional governments. It is going to have to go to the financial markets hat in hand to borrow more money than expected — this is going to drive interest rates up in Spain (and probably in Italy and Belgium) just at the time when Europe’s financial markets were trembling on the brink of yet another panic. And it means that Spain is likely to come to the EU much sooner than expected with a much bigger bailout request than anybody thought.
And there’s more. For the true connoisseurs of the European disaster unfolding so majestically and irresistibly before us like a train falling off a bridge in a film shown in slow motion, it means that the political ability of the Spanish authorities to manage their country’s dire financial predicament is closer to collapse than most European officials have grasped.
Spain is an unhappy federal structure held together by subsidies and crooked accounting. The drive of Catalans and Basques and others for independence has been checked by a system in which the regions of the country have gained more and more fiscal and policy autonomy. That worked pretty well when Spain was booming, the markets were as bubbly as a glass of champagne, money was cheap and credit was good.
But now the music has stopped. Spain’s new European paymasters want the country to march in lockstep. They want the central government to sign austerity agreements that will bind the Catalans, the Basques, the Galicians and everybody else. Essentially, they are demanding that Spain recentralize, and that the national government set out tight national budgets that tell the ‘autonomous’ provinces what they can and can’t do.
This may not work at all, and it cannot work for long. Spain is a democracy. People vote. Sometimes they vote for regional parties, sometimes they vote for the big national ones. If the central government is imposing tough fiscal limits on the provinces, it’s likely that over time — and not much of it — support will shift away from the national parties to the provincial ones. The Catalans will be sure that they are getting cheated by the poorer provinces; others will also believe that they aren’t getting their ‘fair share’.
Between the banking and the provincial debts and the politics of the whole sorry mess, Spain’s government is in an untenable position. As in the Greek case, Europe is demanding actions from Spain that Spain cannot take. This is not policy; it is death.
The news from Spain is so shocking because it is making a lot of people think that Greece is not an isolated case. That is the thin, fragile reed of hope to which Europe’s dwindling band of optimists have clung: that Greece is different, that its insoluble problems are unique, that the inability of the European system to find an acceptable road out of the Greek crisis is a one-off.
But if the steps required by European authorities are also beyond the capacity of Spain to take, we have a very different and much grimmer future to await.
In the short term, the kind of bank run that has been troubling the sleep of European policy planners for the last couple of weeks begins to look unavoidable. (A company that services ATMs in Europe reports unusual withdrawals in Italy as well as in Greece.) The richest and savviest Spaniards have been ditching their country’s shaky banking system and assets in droves for some time; there are signs that some of the less affluent and less savvy Spaniards are sniffing the smoke and edging towards the exits as well. Should the specter of bank runs materialize there will not only be the need for lightening fast action by the ECB and other authorities to stop what would otherwise metastasize into a financial Armageddon; the effect of this kind of insecurity on mass psychology and the behavior of European citizens would unleash uncontrollable and unpredictable political forces. The herd would stampede, and nobody really knows what comes next.(Already there are reports that Greeks resident in the UK are taking out British citizenship even as the UK makes emergency plans to block immigration if the euro should collapse.)
But assuming we somehow get past the prospect of a crisis and the financial equivalent of martial law in the short term, the news from Spain has made Europe’s deepest fears much more credible. Those fears are that the SS Europa, that ‘unsinkable’ ship launched with such fanfare and so much acclaim, is headed toward an iceberg and that it is too late to turn.
What is beginning to look likely in Spain — that the financial meltdown of the country is imposing burdens that the political system cannot sustain — could also be true of Europe as a whole. Europe’s policy makers think they see a path — difficult, but possible — on which Europe could tiptoe past a Greek meltdown and still hold together. It has always been much more difficult to imagine a way to handle a meltdown of Spain with its much bigger economy and its greater population.
The greatest hope for a non-catastrophic outcome to the European crisis has for some time been that Greece really was sui generis and that the other Club Med members could somehow limp into port even as Greece sank. The recent news from Spain suggests that it, too, may be holed below the water line.