Just when you thought it was safe to go outside, it turns out that another storm is gathering on the eurozone horizon.
Spain was always on the ‘one to watch’ list. It now finds itself in that most awkward of positions: the financial equivalent of a vicious circle. The interest rate on its sovereign debt is rising, the economy is stalling and the government is fast losing the enthusiasm to deliver the austerity demanded by Brussels. The process then repeats itself.
Have Spanish yields risen because investors no longer believe the country is either willing or capable of delivering the necessary austerity? Or have they risen because investors think the eurozone’s creditor nations are just running out of patience? Either argument could be used to explain the rise in yields yet there’s a world of difference between deliberate slippage on behalf of the Spanish and a loss of confidence on behalf of their eurozone partners.
Calls for more fiscal pain do not deal properly with the interaction between growth shortfalls and the cost of borrowing within the eurozone. In the old days, weak growth was synonymous with low interest rates. In the topsy-turvy world of the eurozone, weak growth is now more often associated with high interest rates. Austerity, by delivering even weaker growth, leads to even higher interest rates. The only way to get around this problem is to recognise the symbiotic relationship between creditors and debtors. In the eurozone, that means a fiscal union, not the constant bullying of debtors by creditors. Continue reading »