Rumors of my demise have been greatly exaggerated.
--Mark Twain (Samuel Langhorne Clemens), responding to an erroneous obituary proclaiming his death.
It’s been a hectic week for Mariano Rajoy, as Spain’s been the focal point in Europe for most of this week.
Spain’s Prime Minister took center stage Thursday as his government announced its 2013 budget. In it, Spain renewed its commitment to austerity, slashing a further €40 billion from government spending and announcing a raft of legal reforms targeting increased economic competitiveness—43 are proposed in total. Spain will also draw €3 billion from the national social security reserve fund (unlike the US, Spain actually has a “lockbox” for social security—one with roughly €67 billion in it at present) to help meet some (undefined) short-term needs. Most of these reforms are quite unpopular in the country, and protestors took to the streets again Thursday to register their very general displeasure. (Some held a highly unspecific sign emblazoned boldly with only “NO.”)
But it wasn’t just individuals who have objected lately. For weeks now, the regional government in Catalonia has been logging its complaints about the central government’s interference with its budget independence (a long-standing tradition in Spain). Yet, despite the Catalan shouting, Madrid also announced a new central government overseer for regional budgets. (What’s Spanish for chutzpah?)
Many assume these terms—the cuts, reforms and oversight—were pre-negotiated with the European Commission so that if and when Spain seeks a broader bailout than the already agreed-to bank package designed in June, no additional austerity will be required of them. And of course, that’s possible. (Though the government’s official stance, reiterated by Rajoy to interviewers from The Wall Street Journal on Tuesday, suggested there aren’t immediate plans to seek a bailout of any kind above and beyond the banking version.)
But even the existing bank bailouts still seem to be subject to political waffling. Late Tuesday, finance ministers from three of Spain’s eurozone partners—Germany, Finland and the Netherlands—issued a joint statement announcing their view that the ESM’s direct recapitalization of banks should only take place after the eurozone has a single banking supervisor. What’s more, they’d like the ESM to only be able to aid banks with problems beginning after the bank-regulator-to-rule-them-all is up and running. (Operating on the notion this super-regulator would then have had a chance to prevent the problems.)
Spain’s bank bailout fails both these conditions. (Ditto for Ireland, which some had presumed would have its bailout conditions lessened using the Spanish model.) If these finance ministers’ joint position wins the day, it could force Spain’s hand—requiring any bailout to be a sovereign bailout. But that’s if this policy sticking point isn’t overcome.
The European Commission responded to the three finance ministers with a statement akin to, “We’ll see about that.” And the reality is these sorts of politically motivated objections (trying to curry voters’ favor at home by not handing troubled countries a blank check) have been encountered several times during the last three years. Yet when the dust has settled, no calamitous, sudden breakup of the euro has developed. The seemingly hard line has bent. Rules have been changed. We find the likelihood this particular objection proves immutable or impossible to overcome quite remote.
In the last few years, leaders have spent enormous amounts of political capital in support of their eurozone partners and, hence, the euro. Nations have surrendered pieces of sovereignty. Traditions, like the siesta, are being reformed. Labor laws (touchy issues no doubt) are undergoing liberalization. Government-owned properties are on the block. While some, like Greece, have lagged in implementing them, others haven’t. All these are far harder to change than comparatively small provisions of a bailout vehicle that doesn’t even come into existence until next year.
All in all, we doubt leaders will be very quick to throw up their hands at this juncture. And it is precisely this effort that has fooled those expecting sudden shattering of the euro for much of the last three years.
To be sure, things could still go wrong in Europe—and the situation is worth watching. (Not to mention there’s always the risk of unintended consequences.) But in our view, considering the course of the last few years, one shouldn’t quickly discount the view encapsulated well by European Commission President Jose Manuel Barroso in a speech given Thursday:
The reality is, to paraphrase Mark Twain, that the reports on a so-called European marginalisation or even disintegration are greatly exaggerated.