Posts Tagged ‘bailouts’

When Europe Hits a Windmill: The Euro Crisis from Spain (Part I)

Monday, November 28th, 2011

Spain's flag together with the flags of Andalucía and the European Union. The family of European nations is facing the biggest challenge to its existence since World War II.

Recently I went to get some churros con chocolate with a friend studying at Universidad Complutense. He is an educated guy, very sharp, a real “pícaro” who does not hesitate to poke fun at something he finds ridiculous. We began to talk politics, specifically Europe’s sovereign debt crisis, and at one point I noted with amazement and some sympathy that the Germans would be inevitably responsible for bailing out the rest of Europe. My friend looked at me squarely in the eye and said, “They tried to conquer Europe twice in less than a century, without mercy, and left us with Franco. Que se jodan.

You do not have to agree with my friend to see his point. Europe is in serious trouble, and though the Spaniards continue to party until the sun rises, they are increasingly angry and disillusioned. After having experienced one of the great economic miracles of the twentieth century, Spain’s future looks decidedly grim. The Spanish youth will likely suffer a lower quality of life than that of their parents, and so far there appears to be little they can do about it.

In this post, I will attempt to explain Europe’s economic situation, tying in Spain where relevant. A follow-up post will elaborate on Spain’s current circumstances, focusing on what I have been able to observe in person.

The Debt Contagion – Too Little, Too Late

Why is Europe’s economic crisis so scary? The European Union (EU) is the world’s largest economy, with approximately 308 million people. If it goes bust and the 17-nation euro zone dissolves, an economic tsunami would hit the U.S. and the rest of the world. Stocks markets would tank, people’s savings would disappear, banks would stop lending and likely suffer a run on their accounts, and political chaos would follow.

This sounds like a drastic, impossible scenario, until you look at the numbers. Europe’s biggest debtors are facing unprecedented yields on their sovereign debt, with both Italy and Spain above 6% on ten-year bonds. Such levels necessitated European-sponsored bailouts in Ireland and Portugal over the past year. But Italy is the world’s eighth largest economy and third largest bond market. It is too big to be “bailed out.” Without investors buying its bonds, Italy’s government will simply run out of money and default on its debts. The EU’s situation is so tenuous that any number of events, from the failure of a big bank (read: France, whose banks are heavily exposed to Greek debt) to the collapse of a government to more unsuccessful bond auctions could cause its demise. Then there are the political pressures, which are already reaching a boiling point. Both Greece’s and Italy’s governments succumbed to the crisis this fall, and Spanish voters just gave Spain’s conservative opposition party, Partido Popular, an enormous victory on November 20. (more…)