Sure, There's Greece... But What About Spain?

I shall concede all you want me to concede about my fellow Greeks on condition that you give me a plausible answer to a simple question: What on earth is Europe doing to Spain as part of this Grand Plan?
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Let's, for argument's sake, concede that we Greeks are spendthrift, lazy, corrupt, deficit-prone usurpers of other Europeans' hard labor. But what of the Spaniards?

  • Did the Spanish government not have a budget surplus before the Crisis erupted?
  • Was Spanish public debt not lower than Germany's before the Crisis erupted?
  • Was Spain not the one country which, quite remarkably, managed to stage an Olympic Games that (a) was profitable and (b) left behind it splendid facilities and urban renewal (as opposed to debts and white elephants)?
  • Did Spain not develop firms (like Zara) which showed Europe that it is possible to compete head-on with the Far East in sectors that the rest of Europe had exported there (at least in terms of jobs and labour intensity)?
  • Was Spain not the locus of German heavy industrial production (e.g. Volkswagen's Seat) that produced healthy German profits?

And yet, this very country is finding itself in the same black hole into which Greece fell two years ago. How might this be possible if, as conventional wisdom insists, the Crisis is due to Greek-style profligacy?

Even the most cursory look at what is happening to Spain today will convince the open-minded reader that there is something deeply wrong with the conventional view of a 'rational' core -- one that insists on rational economic prescriptions, and a faulty periphery, which is trying to shirk its responsibilities.

Since last summer, the losses of the Spanish banks (caused by ridiculous bets on real estate financed mostly by German banks) had been unloaded on the shoulders of the Spanish state, the result being that the latter was, effectively, shut out of the money markets (courtesy of interest rates exceeding 5 percent). So as to avoid declaring that Spain had formally joined the ranks of Greece, Ireland, and Portugal as the fourth 'fallen sovereign,' Europe's powers-that-be came up with the following brilliant idea:

  1. The ECB will be accepting any piece of paper presented to it by Spain's banks as 'collateral' for massive loans provided at 1 percent interest rate.
  2. But since no matter how may loans one gives to the insolvent, the insolvency does not go away -- Spanish banks were simply buying time in this manner. For this reason, Europe deemed it appropriate that the Spanish state should borrow more money at interest rates ranging between 4 and 5 percent (possibly from the EFSF, Europe's bailout fund) to hand over to the banks in the form of 'recapitalization.'
  3. But since the Spanish state is, as a result of the new borrowing, pushed further into the bosom of insolvency, something had to be done so as to allow it to refinance itself. This is what they decided upon: The same (insolvent) banks receiving capital from the state should lend the state (at 6 percent interest) part of the loans they are receiving from the ECB (at 1 percent interest).

Do you, dear reader, grasp what is going down here? Banks bankrupted by their own idiocy transferred their losses to a state that was, up until then, managing to report a budget surplus. This the state, and the taxpayers, folded into a long term insolvency. Then these same banks secured dirt cheap ECB loans which they lent, partly, to the state they bankrupted at huge interest rates while, at the same time, collecting from them... capital. And to allow for this 'solution' to Spain's difficulties, Europe imposed upon Spain swinging austerity that undercuts the national income from which the state must raise the taxes that will repay all these loans it was forced to shoulder.

So, when journalists the world over, fellow economists from northern climes, German and Dutch politicians, etc., point the finger at the Greek electorate for having made the 'wrong' choice at the polls, i.e. for having shunned Europe's Grand Plan for overcoming the xrisis, I answer in no uncertain terms: I shall concede all you want me to concede about my fellow Greeks on condition that you give me a plausible answer to a simple question: What on earth is Europe doing to Spain as part of this Grand Plan?

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