Spain

The euro has fallen by almost 20 per cent against the dollar since last November, and the general view in Europe is that this is good news – indeed, one of the few pieces of good economic news to have come Europe’s way recently.  The argument goes as follows: euro weakness = more European exports = higher European economic growth.

Unfortunately, the real world is not as simple as that.  Inside the 16-nation eurozone, not every country benefits equally from the euro’s decline on foreign exchange markets.  As Carsten Brzeski of ING bank explains, what matters is not so much bilateral exchange rates as real effective exchange rates.  These take into account relative price developments and trade patterns, and their message for the eurozone is far from reassuring. Read more >>

Rumours are flying thick and fast that the troubles of Spain’s banking sector will require emergency attention at Thursday’s summit of European Union leaders in Brussels.  But it appears highly improbable that Spain will ask for help from the emergency financial stabilisation fund that EU finance ministers agreed to set up last month.  For one thing, the fund is not yet fully up and running.  For another, the Spanish government is emphatically not shut out of credit markets – a point underlined this morning by the successful issuance of €5bn worth of short-term government bills.

Spain’s economic vulnerabilities are obvious, and the implications of a Spanish crisis for the rest of the eurozone are no less clear.  French and German banks alone are exposed to some $450bn of Spanish debt, according to a report just published by the Bank for International Settlements.

But it is worth repeating that Spain is not Greece.  The Greek crisis originated in decades of mismanagement of the public finances, plus an unhealthy culture of corruption and use of the state for political patronage.  Although such practices are not unknown in Spain – and not unknown in the US, China and numerous other countries, for that matter – they have never attained Greek levels. Read more >>

Slowly, too slowly perhaps, the eurozone is delivering its response to the collapse of market confidence triggered by the European sovereign debt crisis.  An important step appears likely to be taken at a finance ministers’ meeting in Luxembourg on Monday.  They are set to agree the terms on which a Special Purpose Vehicle will be able to borrow up to €440bn on the markets to help a eurozone member-state that is experiencing borrowing difficulties.

On the face of things, this initiative goes considerably further than the €110bn rescue package arranged last month for Greece. The Greek aid is based on bilateral loans from other governments in the 16-nation eurozone. But the SPV will be a self-contained entity, operating under Luxembourg law, that will issue bonds backed by member-state guarantees.

You could almost call them “common eurozone bonds” – except that, for political reasons, this is an all but unmentionable term.  Opposition to common eurozone bonds is exceptionally strong in Germany, where the prevailing view is that such a measure would simply benefit wastrels like Greece and impose higher borrowing costs on countries that practise fiscal discipline – i.e., Germany itself.  Nonetheless, the German government has taken an energetic role in designing the structure of the SPV.  It is a big moment for Germany and one which shows that the German commitment to making a success of European monetary union is not to be underestimated. Read more >>

Two weeks ago European leaders decided to postpone an upcoming summit of something called the Union for the Mediterranean.  It is safe to say that very few people in the Mediterranean noticed or cared.

The story of the UfM is a classic tale of what passes for foreign policy in today’s European Union.  The organisation was the brainchild of President Nicolas Sarkozy of France, who wanted to strengthen relations between the EU’s southern member-states – such as France, Italy and Spain – and their North African and Arab neighbours across the sea.  It was not a bad idea in principle.  But it aroused the suspicions of Germany and other northern EU countries, which insisted in the name of European unity that all EU member-states should belong to the UfM. Read more >>

For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues.  (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)

The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn.  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage. Read more >>

Well, did he say it or didn’t he?  I am referring to President Nicolas Sarkozy of France.  According to El País, Spain’s most reputable newspaper, Sarkozy told his fellow eurozone leaders at a May 7 summit that France would “reconsider its situation in the euro” unless they took emergency collective measures to overcome Europe’s sovereign debt crisis.  The source?  Officials in Spain’s ruling socialist party, quoting remarks purportedly made after the summit by José Luis Rodríguez Zapatero, prime minister.

It would be extraordinary, if true – for two reasons.  First, if France were to leave the euro area, European monetary union would have no reason to continue.  It would collapse.  And that would be like dropping a financial nuclear bomb on Europe.  Secondly, it is inconceivable that France would consider it to be in its national interests to take such a drastic step.  We are left to conclude that if Sarkozy really did utter these words, it was just a bluff to get Chancellor Angela Merkel of Germany to sign up to the eurozone rescue plan that was ultimately agreed in the early hours of May 10. Read more >>

Better late than never.  That is one way of looking at the three-year, €110bn rescue plan for Greece that was announced on Sunday by eurozone governments and the International Monetary Fund.  It took seven months of indecision, bickering and ever-mounting chaos on the bond markets for the eurozone to get there, but in the end it did – and it may just have saved European monetary union as a result.

Looked at in a different light, however, the rescue package does not appear to be such a masterstroke.  For its underlying premises are, first, that there should under no circumstances be a restructuring of Greek government debt, and secondly, that Greece’s troubles are unique to itself and need not be considered in a context of wider eurozone instability.  Both premises are open to question. Read more >>

You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency.  Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.

This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times.  As it happens, I don’t agree – if by IMF assistance we mean financial help.  The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. Read more >>

Europe’s leaders are getting radical.  On Thursday the presidents, prime ministers and chancellors of the European Union will meet for a day of economic policy discussions in Brussels – but not in their normal location, the marble-and-glass Council of Ministers building, famous for its charmless, disinfected atmosphere and its 24km of headache-inducing corridors.  No, this time they will get together in a nearby building called the Bibliothèque Solvay, which is a pleasant old library rented out for dinners and receptions.

The switch of location was the brainwave of Herman Van Rompuy, the EU’s first full-time president, who thought it would encourage a more creative, informal exchange of views.  He has introduced another innovation: each leader is to be restricted to just one adviser at the talks.  This isn’t a problem for countries with leaders who are masters of economic policy detail.  But others are less happy about the arrangement.  It is whispered that the Italians are swallowing especially hard, wondering what on earth Prime Minister Silvio Berlusconi will say once he’s on his own. Read more >>

Whether it’s climate change, foreign policy or the increasingly alarming fiscal crisis, the European Union’s difficulties can be summed up in one word: disunity.  After December 1, when the EU’s Lisbon treaty came into force, disunity was supposed to be a thing of the past.  Instead, disunity has proved to be very much a thing of the present.  What’s more, the Lisbon treaty may – at least in the short term – be making matters worse.

Take the world conference on climate change at Copenhagen in December.  According to Connie Hedegaard, the EU’s incoming climate change commissioner, disunity – in the sense of a cacophony of European voices – was an important factor behind the ability of other powers to brush aside the EU’s views.  “Those last hours in Copenhagen, China, India, Japan, Russia and the US each spoke with one voice, while Europe spoke with many different voices.  Sometimes we spend so much time agreeing with one another that when finally the EU comes to the international negotiations, we are almost unable to negotiate,” she told her confirmation hearing at the European Parliament last month. Read more >>