The bailout: a mistake?

Quite interesting and important comments made yesterday by the former Spanish PM José Maria Aznar. He blasted EU leaders' response to the Greek crisis, telling Le Figaro that “it has been a mistake to rule out the restructuring of Greek debt under IMF control. We might have used part of the enormous capital made available by the EU to recapitalise banks. Yet, we have preferred conveying the message that we will not let any Eurozone member go bankrupt, without realising that there are huge differences among countries. A bailout for Greece was feasible, but it would be impossible for a country like Spain. Spain’s bankruptcy would provoke the collapse of the euro, and probably of the EU."

(On a side note, we advocated that the option of restructuring or default be seriously considered last month)

Proponents of bailing out Greece have frequently suggested that a restructuring would pose a threat to Europe's fragile banking system. Aznar simply makes the case that if you want to save the banks, it would be better to do it directly.

However, his claim that a Spanish default, and accompanying collapse of the single currency, would probably lead to the "collapse of the EU" is not completely credible and use of such language seems to be more frequently used to instill a sense of fear of apocalyptic scenarios, should the euro collapse, in order to paper over any concerns citizens might have over the moral hazard of the eurozone bailout. For one thing, everybody can imagine an EU without a single currency, as this is what we all had until 1999 and is still the reality for 11 of the 27 EU countries. Perhaps what he meant was that the project of a federal Europe might collapse.

One last element in the interview is worth commenting on. Aznar suggests that "national stability pacts" would be part of the solution to save the Euro. But that beggars the question: would this have helped Spain? The country has more or less respected the stability pact over recent years, and yet it is in trouble.

ECB interest rates adapted to slow-growing countries like Germany and its neighbours were too low for fast-growing countries such as Spain, and fuelled a real estate boom and bust there.

Spain’s problems have nothing to do with irresponsible Spanish budgetary policy, as was the case in Greece, but are intertwined with monetary union. More budgetary supervision, which the EU has been touting, is therefore not going to help. It will come down to transfers between richer eurozone states, and those struggling with their legacies of budget deficits. Good luck telling that to voters.