Spanish debt: FAantastic…
Spain’s downgrade exposes the Gordian knot of austerity measures
The Chinese author Lu Xun once proposed a grim analogy to his readers. Imagine, he said, you are trapped in an iron house without windows, one which you have little hope of destroying and in which you will surely suffocate and die. Before you lies a group of sleeping souls, blissfully unaware of their encroaching death. If you wake them and make them aware of their plight, you force them to endure the terror of the situation and the agony of impending asphyxiation. “But if a few awake,” Lu Xun points out, “you can’t say there is no hope of destroying the iron house.”
Lu’s used his metaphor as a parable for modern China, but it is a fitting vista of today’s Europe, where people and politicians alike slumber mindlessly in their iron abodes. For the past year euro-zone leaders have tried to contain their sovereign debt crisis with half-measures and cheerleading, all of which show a complete disassociation with facts. Greece is insolvent, French banks are tottering, and Silvio Berlusconi’s Italy is clearly on the way down. Meantime, French President Nicolas Sarkozy and German Chancellor Angela Merkel can’t seem to agree on when to meet, much less on how to go about increasing the lending capacity of the European Financial Stability Facility (EFSF). Most now agree that the EFSF will need to have its funds enlarged to €2 trillion ($2.7 trillion), that many of the weakest euro-zone banks will need to be recapitalized, and that Greece will need another writedown. Mr. Sarkozy, for his part, would like to see the EFSF be turned into a bank. Yet Mrs. Merkel and her rapidly fraying coalition government will not hear of it. Why not set an upper limit of €1 trillion, says the Bundestag? Good grief.
It was no surprise, then, that the credit-rating agencies took Spain’s projected yearly growth of 1% as reason to panic. On Tuesday, Moody’s downgraded Spain’s bond ratings from Aa2 to A1 and followed up by downgrading Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and CaixaBank SA. The decision came just a few days after S&P and Fitch downgraded Spanish debt, and just several weeks after Italy was downgraded by S&P on September 20th. In its report, Moody’s cited the vulnerability of Spain to the fluctuations of financial markets, a slowdown in export growth, and the continued pain likely to result from deficit reduction as the main reasons for the downgrade. Spanish officials maintained a cheery face, nonetheless. Finance Minister Elena Salgado blamed the downgrade on market fluctuations elsewhere and called the country’s credit rating “excellent.”
All three downgrades illustrate the central absurdity of the euro-zone crisis: that the very nations that need to pull themselves out of the hole must dig themselves deeper via harsh austerity measures. Every bundle of cash has come with strings attached, rules forcing Greece and others to pummel their weak economies with public-sector layoffs and tax hikes. Such draconian conditions are silly; Greece, Ireland, Portugal, and Spain were sickly economies before the crisis, and stinginess on the government’s part will merely exacerbate the problem. Moreover, austerity has alienated millions of those countries’ citizens, who have taken to the streets to protest what they see as a sinister political process that sells them down the river.
To be sure, politicians in debt-laden economies deserve plenty of blame; for years their leaders, in a cynical ploy to win votes, promised people lavish welfare states while passing the burden of large deficits on to future governments. But we have a short memory if we forget that “compassionate capitalism” was a genuinely European phenomenon; its slogans were mouthed in Berlin and Athens alike, and the present crisis has revealed the folly and irresponsibility of such a course. Sooner or later the illusion had to give way.
Now, however, is not the time for hypocritical finger-pointing. Greece and the others need help, and fast. Over these agonizing weeks, Germany has clearly been the main obstacle to a sound rescue. Its people adamantly refuse to pay for what they see as other nations’ profligacy, insisting that they enshrined frugality in their constitution while the rest of Europe spent unwisely. That is a botched version of history. Germany’s debt now stands at over 80% of GDP – its governments have been about as reckless as the rest of Europe. Regardless, Mrs. Merkel, in an attempt to indulge her people’s chauvinistic daydream, has become the strongest advocate of the austerity that is now sapping the life out of Greece, Ireland, and (soon enough) Portugal. Her move to postpone the Brussels summit is just one more maneuver meant to put off a difficult decision.
It is time for Europe’s leaders to get themselves together. Budget crises require straight talk, not detached and optimistic drivel. The eurozone is drawing closer and closer to the brink, and Mrs. Merkel, more than any other participant in this fiasco, is beginning to seem more and more the problem. That is a shame. Thus far, she has managed to steer Germany tactfully by being a charismatic and resourceful leader. Her predecessor, Helmun Kohl, was willing to take a political blow to reform the country’s outrageous union laws; she ought to be able to match him when the stakes are much higher. Otherwise she will sink not only Germany’s future, but Europe’s as well.