Opinion     

Spain avoids EU austerity, implements its own

China.org.cn, May 20, 2012

• Nowhere to ram [By Zhai Haijun/China.org.cn]

  A downgrade of Spain's debt rating is once again grating on the taut nerves of the Europeans who thought they were on the way to escaping from the quagmire of the European debt crisis. For Europe as a whole, the significance of Greece's debt crisis is more symbolic than practical. No matter how bad the situation becomes, Greece's limited economic scale has determined that the crisis will be nothing more than a regional issue. However, with Spain needing to refinance its debt of 150 billion euro in 2012, twice the sum of Greece, Ireland and Portugal, the EU absolutely cannot afford to drop this ball.

  Since it joined the EU in 1986, Spain has always been a model student among EU member states in every respect. Convinced by its economic prosperity after joining the EU, Spanish politicians advocated "Europeanization" on their election platforms and its people took the regulations and directives from Brussels as a panacea.

  In the face of the debt crisis, the Spanish government seems quite conservative. In fact, one of the safest and most effective ways to address the crisis is to ask the EU for a massive bailout by immediately applying for the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM). However, the Spanish finance minister has ruled out seeking EU assistance when Spain's debt rating was downgraded. It is possible that Spanish leaders are embarrassed by the prospect of holding out their hands to Merkel. But on a deeper level, accepting assistance from the EU means giving up its right to control the domestic banks.

  Maintaining dignity can be costly. In recent weeks, Spanish Prime Minister Mariano Rajoy must have felt this. In order to resolve the crisis independently, the Rajoy administration quickly introduced a series of reform measures. On the one hand, the government launched a severe banking assets restructuring plan. Rajoy even readied to backtrack on pledges not to use more public money on banks – the government is planning a state bailout of Bankia, the country's third biggest bank. On the other hand, it continues to implement severe austerity policies. A cut of 10 billion euro in education and health budget has generated huffing and puffing from the Spaniards. Local governments at all levels have become victims of fiscal tightening.

  The two sets of plans appear to be expensive with uncertain outcomes. In view of the banking sector, the root of the problems for Spanish banks is the bad loans left after the burst of its real estate bubble. The problem is particular serious in Bankia Bank. Rajoy does not want to take responsibility for the political and social unrest as a result of bank failures. He wants to restore public's confidence towards Spanish banking industry. To this end, he has no choice but to spend valuable government reserves on the banks' bad debts. However, with the declining real estate prices, consumer confidence nationwide is shrinking. The public is doubtful that the housing loans previously considered to be healthy are still safe.

  Still, the austerity policy could actually further damage the Spanish economy. Rajoy's socialist predecessor had enforced a series of tightening policies proposed by the EU two years ago. The economy remains in the doldrums. The debt problem hasn't been relieved. The only change is the fall of the Spanish Socialist Workers' Party. The mounting number of unemployed workers and students that lost their education grants has developed into two active volcanoes that could erupt at any time.

  What the Rajoy administration is bidding for with such a high price seems very clear: time. With enough time, Rajoy may be able to count on Spain's economic recovery to solve the tricky problems. For now, there are two straws for the Spanish government to clutch at. On the one hand, Spain's exports rose 11 percent last year as it gradually restored its competitiveness. In addition, due to the economic downturn, the domestic purchasing power declined in Spain. Thus the trade deficit will decrease. On the other hand, Spain is a big tourist country. It attracts 11 percent of the tourists who travel to Europe from elsewhere around the world. The Spanish tourism industry has experienced several consecutive years of growth since 2009. With the summer approaching, the 2012 travel peak is around the corner. If the frequent airline strike can be properly resolved, the tourism industry may become the wild card that could save the Spanish government.

  However, the market is cruel. Before positive prospects turn into reality, investors would not stand in Spain's favor. In the foreseeable future, speculators will not miss any chance to short sell Spain and practice arbitrage. For the Rajoy administration that has taken on a path of severe austerity, there are not many remaining cards to play. With all his chips on the table, Rajoy's political survival depends on any signs of life while under the watchful eyes of impatient voters and the market.

  Zhang Haiyang is a researcher with the Institute of European Studies, Chinese Academy of Social Sciences.

  This article was written in Chinese and translated by Li Huiru.

  Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

   

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