You think the Greek and Irish crises were bad?

Wait until Spain’s economy goes into meltdown. That could be the blow that triggers the end of the Euro:

Economists say that given Spain’s large deficits and poor long-term growth prospects, any failure to achieve government targets for cutting the deficit, and/or any rise in Spanish bank risk, could cause a market panic and turn Spain into the next victim of market contagion.

A financial meltdown in Spain would have repercussions far beyond the Iberian Peninsula. For starters, many analysts believe a debt crisis in Spain would trigger a similar meltdown in Italy, which is the fourth-largest economy in the eurozone, and which suffers from many of the same financial woes that are plaguing Spain. What’s more, Italy has one of the world’s highest public debts, expected to reach a staggering 118 percent of GDP in 2010.

Given the relative size of the Spanish economy, financial turmoil in Spain would likely also doom the single European currency, and with that more than 60 years of European dreams of transforming the continent into a superpower-like United States of Europe capable of counter-balancing the United States of America on the global stage.

Germany, which arguably has more invested in (and also has benefited more from) the European Union than any other country in Europe, is alarmed by the potential unraveling of the euro. German Chancellor Angela Merkel says the prospect of serial European bailouts is “exceptionally serious,” and that while she does not want to “paint a dramatic picture,” it would have been hard a year ago to “imagine the debate” now taking place in Europe.

I know about as much about government finances as I do Buddhist theology, but, Chancellor Merkel’s desire to save the Euro aside, it would not surprise me to see, in a crisis created first by a Spanish and then an Italian crash, Germany withdraw from the Euro in order to protect its own economy. Germans already hated the bailout given to the profligate Greeks, and I imagine there’s grumbling about the deal given the Irish. Just wait until they’re presented with a bill from Madrid and Rome. I could well imagine even the Chancellor throwing up her hands and shouting Wir haben genug!

In any event, do read the whole article. It’s a good overview of both the problems Spain faces and the limited options it has to address those problems, given its entitlement-addicted people, inflexible labor market, and the power ceded to the European Central Bank.

Question: If the Euro zone does collapse like the wet paper bag it is, does that kill the European Union, too? In the abstract, the death of that burgeoning bureaucratic dictatorship would seem to me a desirable thing. But it would be potentially very, very messy. As in “We’re angry, resentful, feeling hyper-nationalistic, and we don’t like you” messy.

 

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