Merkel 'Evolving' On Spanish Bailout Deal Without Austerity Program Attached

German Chancellor Angela Merkel appears to be caving in:

A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say.

While Berlin remains firm in its rejection of Spain's calls for Europe's rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland.

Instead, Spain would only have to agree to new conditions tied to the reform of its banking sector. Berlin is also exploring the possibility of funneling aid to Spain's Fund for Orderly Bank Restructuring rescue mechanism (FROB) to reinforce the message that it is the country's banks and not its public finances which are at the root of its problems.

The evolving German stance on aid for Spain is the latest evidence that Chancellor Angela Merkel is adopting a more flexible approach to solving the euro zone's deepening debt crisis.

There are a few problems with this.

First of all, Merkel is going to have to somehow convince German taxpayers to go along with it.

Second, the amount of money requested is staggering, larger than any previous bailout. At current birthrates, Germany's newer generation of taxpayers is going to be far less than its current one, and Spain is even further behind in reproducing its present population. If a debt of 110% of Gross Domestic Product can't be paid off now by 100 Spaniards, it's highly unlikely that 30 Spaniards are going to be able to do it. Nor is it likely that 42 Germans are going to be able to continue to support the same level of largesse for the entire eurozone that 100 Germans do today,paying off long term debts that are essentially valueless at his point anyway, since they're based on a real estate and construction bubble that makes what happened in America look benign by comparison.

And third, Chancellor Merkle is going to be pinned down on the sofa and subjected to what I call the gang bang rationale.."hey, you did it for him, you can do it for me, so just lay back and enjoy it."

The Greeks, the Portuguese and the Irish have already been subjected to severe austerity packages for past bailouts, and those programs, if you can call it that, are still ongoing. After seeing Spain get even more money for doing absolutely nothing but threatening to leave the euro, they're going to want their austerity programs waived too..or else. And other countries in similar territory, like Italy, are going to want to pull the same thing.

Merkle and Germany would be far better off telling Spain (and Greece, for that matter) to get bent. Either that, or simply writing off their debts and taking the pain now while it's still manageable rather than spreading the infection throughout the eurozone.

To go back to the analogy I used the other day, it's a choice between amputation and learning to enjoy gangrene as it spreads throughout the remaining healthy parts of the body.