Ten short days ago, the $125 Spanish bank rescue plan was being hailed, briefly, by rattled European officials as a breakthrough that would stabilize the eurozone’s fourth largest economy.
Now yields on Spanish 10 year bonds have passed 7 percent, the “magic number” that forced Greece, Ireland and Portugal to seek national bailouts, and the talk is growing that Spain is going to need another, bigger bailout: of the country, not of the banks. 7 percent is a magic number because when heavily indebted countries have to pay that kind of interest on their debt, a doom spiral sets in: the high interests rates make their debts harder to service and raises the ratio of debt to GDP. That higher risk leads investors to demand even higher interest rates, and that makes the debt even less sustainable, driving interest rates even higher.
Repeat until dead.
This is the prospect Spain now faces, and the only way out would be an EU bailout of the Spanish government. From the FT:
A full bailout would cost something close to €500bn, stretch the resources of the EU and the International Monetary Fund, and raise the possibility that Italy would also require assistance and so herald a break-up of the euro.
€500 billion is about $625 billion; even by today’s standards, that is a lot of money. It would more than wipe out the funds Europe currently has available for bailouts, and the US among others would be under intense pressure to kick in more money through the IMF.
And as the FT notes, Spain might not be the star of the show; an Italian bailout would be substantially bigger.
The establishment of the euro was clearly one of the worst policy decisions of all time, right up there with Napoleon’s invasion of Russia. A united European establishment joyfully signed an agreement that would blight the lives and crush the hopes of tens of millions of Europe’s people. Many people warned of disaster at the time, but the European leaders were so arrogant and so ignorant (that most fatal of combinations) that they pressed on regardless.
They are a bit less arrogant now, but immense damage has already been done. At almost every important historical turn since 1914, Europe has made disastrous mistakes. For the forty years of the Cold War, Europeans behaved with unwonted wisdom and discretion, building the most prosperous and peaceful system the old continent had ever known.
But ever since the end of the Cold War — when the first big decision the French and Germans took was to go for a monetary union without first doing the hard (and maybe impossible) work of building a real political union that could sustain a common currency — Europe has resolutely and repeatedly chosen the wrong road again.
It is tempting for some Americans, irritated by the smug condescension with which Europeans so often criticize America’s failures even as the United States assumes a greater portion of Europe’s defense burden, to gloat at the EU’s misfortunes. At Via Meadia we can’t do this. Europe’s peace and well being are too important. Via Meadia hopes, indeed we pray, that Europe’s harried and flawed leaders can find a way forward now. America can manage in a world in which much of Europe is broke, weak and divided, but for us, for the Europeans and for the whole human race a successful and peaceful Europe is greatly to be preferred.