Philip Whyte and Simon Tilford argue in a paper for the Centre for European Reform (CER) that this is a “damagingly partial and self-serving” version of events.
“It wrongly assigns all the blame for peripheral indebtedness to government profligacy; it makes no mention of the far from innocent role played by creditor countries in the run-up to the crisis. The result was an explosion of current-account imbalances inside the eurozone. As a share of GDP, these imbalances were far bigger than those between the US and China,” they said.
More than any other country, Spain exposes the lie behind this German narrative. It did not cheat, like Greece. It did not breach the Maastricht Treaty’s 60pc debt ceiling like Italy (or Germany itself). Its public debt was 36pc of GDP before the Great Recession. It ran a budget surplus of almost 2pc of GDP in 2007 and 2008.
We can all agree that Spain has been far too slow to dismantle its Franco-era apparatus of labour privileges, or to end the inflation-linked wage rises eating away at intra-EMU competitiveness. But that is just one aspect of the story.
“The eurozone crisis is as much a tale of excess bank leverage and poor risk management in the core as of excess consumption and wasteful investment in the periphery,” said the CER paper.
Indeed, Spain has been the biggest victim of cheap capital from German, Dutch, and French banks. It was further destabilized by the loose policies of the European Central Bank.
Lest it be forgotten, the ECB allowed the eurozone’s M3 money supply to rise at double-digit rates in the middle of the last decade (against a target of 4.5pc) in order to lift Germany out of slump. It tilted policy to German needs, blighting the South.
ECB monetary policy led to real interest rates of minus 2pc for Spain, fuelling a destructive credit bubble despite the heroic efforts of the Bank of Spain to contain the damage. Yes, Spain would have had a crisis anyway. A fast-growing catch-up economy needs a higher interest rate structure, but all Europe seemed to have forgotten that elemental truth on E-day.
This credit excess is the reason why there is now an overhang of 1.5m homes on the market or still being built, according to data from consultants RR de Acuña. Property prices have already dropped 28pc. The firm predicts further falls of 20pc.
It is why Spain’s international investment balance has swung wildly negative to over €1 trillion, or 90pc of GDP.
Given that the structure of EMU itself caused the North-South imbalances that lie behind the crisis, the EU authorities and the creditor states surely have a duty of care to the countries now trapped in slump. Instead, we heard last week from Brussels that the Spain must “help itself”, and from Germany the usual mantra of reform.
“Some of the governments imposing measures ought to apply the same medicine to themselves,” said the PP’s finance chief Cristóbal Montoso.
The Rajoy team hopes this will be a replay of 1996 when the party took over a prostrate economy from the socialists, and unemployment was almost as high. It tightened then with Prussian discipline, stunning Europe by meeting the entry terms for EMU.
“Spain is going to take the lead in economic stability once again, as we did in the 1990s: the situation is not so different now,” said Mr Montoso.
One admires the grit, but this is nothing like the mid-1990s, when the world was growing briskly, and the devalued peseta was super-competitive against the D-Mark. Today the whole of Europe is tipping back into recession and Spain is 30pc less competitive against Germany.
My own view is that Spain is still fundamentally “saveable” within EMU. Spanish exports rebounded from the 2008-2009 crash almost as fast German exports, outperforming Italy and France.
But this cannot be achieved as long as fiscal and monetary policy are set on slow grinding slump; nor if the burden of adjustment falls entirely on the weaker states as in the 1930s, forcing these countries to slash themselves into a Grecian vortex of self-feeding recession.
German finance minister Wolfgang Schauble – the most dangerous man in the world – is imposing a reactionary policy of synchronized tightening on the whole eurozone through the EU institutions, invoking a doctrine of “expansionary fiscal contractions” that has no record of success without offsetting monetary and exchange stimulus. What is abject is that EU bodies should acquiesce in this primitive dogma.
“Too much virtue has become a collective vice. The collective outcome of all member-states tightening fiscal policy has proved brutally contractionary for the region as a whole,” said the CER paper.
“Household and business confidence is crumbling rapidly across the currency union. On current policy trends, a wave of sovereign defaults and bank failures are unavoidable. Much of the currency union faces depression and deflation.”
It Germany genuinely wishes to save Spain and Italy, it must allow EMU-wide reflation and mobilize the ECB as a lender of last resort to halt the bond crisis, since the EFSF rescue fund does not exist.
To create a currency without such a backstop is criminally irresponsible. If this role is illegal under EU treaty law – and that is arguable – then EU treaties must be changed immediately.
If Germany cannot accept this for understandable reasons of sovereignty or ideology, it should accept the implications and prepare an orderly break-up of monetary union. That is the only honourable course.
In the meantime, one can only watch with grim foreboding as the fifth successive government collapses in Europe’s arc of depression, to be replaced by saviours who can save nothing.
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