Sunday, June 10, 2012

The Rot Thickens - Spain Accepts Massive EU Bailout

Spain has accepted a massive EU bailout of its banking sector by European finance ministers of an aid package of up to $125 billion.

Prime Minister Mariano Rajoy of Spain and members of his government are vigorously spinning this as 'aid to the banking sector' rather than a bailout, but a bailout is exactly what it is. While Spain has avoided the kind of austerity strictures forced on Ireland, Portugal and Greece, the money is not going to be given directly to the banks, as Spain wanted.Instead, it's going to be distributed to the FROB, the Spanish government agency responsible for regulating Spain's banks, as who previously handled a Spanish government funded bailout for Spanish banking giant Bankia. That means the Spanish government rather than the individual banks are going to be responsible for the debt, with will skyrocket to Greek levels, 110% of Spain's Gross Domestic Product.

Even worse, this is essentially a band-aid used to treat a bad case of gangrene. Spain's banking woes are due not only to a vastly inflated Euro-socialist public sector but to a huge bubble in property and construction. Not only are the full effect of the toxic loans and investments in Spain's real estate and construction sector throughout the eurozone still to be totaled up, but the debt is simply unsustainable given Spain's economy and more importantly, its demographics. There simply aren't going to be enough young Spanish workers to pay off the debt in the foreseeable future.

This, of course, gives rise to another question, examined in a great piece written in the Financial Times by Niall Ferguson and Nouriel Roubini.

Being pragmatists, Ferguson and Roubini focus on practical ways to preserve the eurozone. As they point out (and as you read in these pages previously), there is a real danger of bank runs because there is no system of insured deposits in European banks, massive amounts of currency have already left southerm Europe and EU countries like Denmark and Britain that don't use the euro are erecting firewalls to keep euro deposits and out of their banking systems.

Ferguson and Roubini also call for a EU-wide banking system with no ties to any sovereign EU country, and quite rightly point out that the rise of Hitler was presaged by a banking crisis in the 1930's. Here's the part they're missing.

The EU project has already done massive damage to democracy in its nation states and foisted what amounts to an unelected bureaucracy on them. The original way this was sold was as an economic union only, that would not impinge on the sovereignty of individual countries.It's morphed into something far different.

German Chancellor Angela Merkel has allowed herself to be pressured into agreeing to loading unsustainable debt on the German people she claims to represent without their consent and, if recent polls are to be believed, over their overwhelming opposition.Not only that, but if the sort of EU-wide banking system and the accompanying controls are set up by the EU's bureaucrats,they're going to be impossible to remove without exactly the major political upheaval the current agreement is designed to try and avoid.

The truth of the matter is that Germany has benefited from the EU because it has allowed them to price their exports in a cheaper currency. But it's not hard to see a populist demagogue seeking power on a platform of nationalism and repudiation of taxes and debt based on funding bailouts the Germans never agreed to in any sort of referendum in the first place.

As I mentioned before, there's also another factor involved. Now that Portugal, Ireland and Greece have already suffered under austerity programs in order to obtain their bailouts, is there any incentive to their continuing to do so now that they see Spain getting its bailout without them? And let's not even mention Italy, the next eurozone country likely to need one.

Chancellor Merkel at least had her gut level instincts in the right place when she was talking about the need for austerity, which basically meant curbs on the EU's bloated public sector spending. Having been hammered by the new socialist government of France and weighing the damage to Germany's export based economy, she's now decided to go with the flow and wearily acquiesce to 'growth' which is a socialist euphemism for even more government spending. And the centralization of the eurozone's banking system in order to recapitalize the debts of countries like Spain merely spreads the infection to the remaining members that still retain a degree of financial health.

This will not end well.


Anonymous said...

The Spanish bailout proposal seems to be its own beast: the usual pros and cons, but you clearly understand that. Although just before I stumbled onto a pretty neat article that seems to summarize the whole situation quite well ( In any event, I’m curious to see where this whole thing goes. Fingers crossed for the EU.

Old School said...

Hopefully this will spell the beginning of the end of the EU 'project'.

Italian Girl said...

That would certainly be a pleasant side effect. But the economic chaos it would lead to would be awful. Have you thought about that Old School?