Two weeks after Prime Minister Mariano Rajoy of Spain vowed “there will be no Spanish banking rescue,” and after days of delay in which Mr. Rajoy pressed European officials for sounder rescue terms, Spain has now joined Greece, Ireland and Portugal as the latest bailout recipient. Catastrophe averted? Hardly.
Bailouts — this one is worth up to $125 billion — are supposed to help restore investor confidence. But investors have clearly figured out what too many European politicians are still denying: serial bailouts, piecemeal plans and one-size-fits-all austerity are not a solution.
On Monday, Spanish and Italian borrowing costs spiked after Mr. Rajoy, the day before, had lamely tried to downplay the new bailout — calling it a line of credit — while Mario Monti, Italy’s prime minister, publicly warned of a “permanent risk of contagion.”
And the next potential calamity is just days away. On Sunday, Greek voters will go to the polls to choose a new government and, by implication, whether to stay in the euro zone. A disorderly Greek exit (it is hard to imagine an orderly one) could threaten bank stability throughout the euro zone. Some analysts are warning it could provoke a Lehman Brothers-like global financial seizure.
Spain urgently needed the bailout, and it may turn out to be a better package than the others. The Spanish government will be able to use the money for the sole purpose of recapitalizing its banks, avoiding the onerous and counterproductive austerity conditions imposed on Greece, Ireland and Portugal.
The looser terms were presented as a reward of sorts for Madrid’s voluntary fiscal stringency over the past several months. We hope that it also means that German and other European officials are beginning to figure out that the relentless austerity they have demanded has been a failure. Fiscal contraction has deepened recession in Europe’s struggling economies, making them less able to repay their debts. It has also led to social and political upheaval, with Greece as Exhibit No. 1.
Spain’s troubles are rooted not in profligate government borrowing but in the bursting of a housing bubble that has devastated banks that lent too much, too recklessly, for too long. The bailout correctly gives the European Union the authority to monitor the bailed-out banks and a greater voice in structural reforms, including loosening the tight links between local politicians and local banks.
But Spain is not out of the woods. The aid will add to the country’s debt load, making it harder for the government to repay its existing debt while delivering basic services. A subsequent bailout to shore up the government is probably unavoidable.
Which brings us back to the main issue. With every stopgap solution to the euro-zone debt crisis, the gaps have gotten larger and the stops have gotten shorter.
Europe’s leaders — especially Chancellor Angela Merkel of Germany — need a new playbook. Previous austerity pacts must be softened; if it is politically impossible to refer to that process as a “renegotiation,” then call it something else, as long as new agreements allow for growth measures to address high unemployment.
At a meeting scheduled for later this month, Europe’s leaders must also accelerate the process of institutional integration, beginning with the Continent’s banking system, including euro-zone-wide deposit insurance, bank supervision and joint plans for managing bank failures.
If Europe can’t take those first steps, then it would be folly to believe that leaders will ever agree on fiscal and political unity, without which the euro will not make it.
Editorial, The New York Times, 11/06/2012