The euro mess is getting worse again.
With Greece seething over the strict austerity measures required as terms of its bail-out, Spain’s Prime Minister Mariano Rajoy is hoping that biting the bullet now can keep his government and even his country together. With Spain’s interest rates now retesting the six percent level, the alternative to a dramatic and convincing austerity budget in Spain is a new ECB bailout. That would mean a humiliating, Greek-style loss of sovereignty, and cripple Prime Minister Rajoy and his center-right government.
We’ll know more details soon, but Rajoy has announced plans to move toward a stricter implementation of the retirement age (65), along with other steps aimed at tightening up, reports the Wall Street Journal:
In an interview with editors and reporters of The Wall Street Journal, Mr. Rajoy said measures to be unveiled Thursday would also include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations.“The retirement age is reasonable in Spain if it is actually met,” Mr. Rajoy said—referring to the mandated age of 65 years—”so we are going to deal with those issues of early retirement.” He said the government wouldn’t eliminate the option of early retirement but would limit the capacity of individuals to stop working at around 60, as many do now.
Spain’s pre-bailout plans are inciting the same anger we’ve been seeing in Greece this week. But Spain has an additional problem: its debt is not evenly split between its regions, which are already restless and enjoy a good deal of autonomy. Regional independence protesters such as those in Catalonia are now being joined by anti-austerity protesters. As the New York Times explains, this is very bad news for the prime minister:
Economists warned that the call for a Catalonia election added yet another element of uncertainty for Spain.
“Once comforted in power after elections, the government could then work more constructively towards a redefinition of the relationship between the central government and the regions,” said Gilles Moëc, an economist at Deutsche Bank in London. “Still, in the meantime, political turmoil in Spain’s richest region could generate the kind of market reaction which would precipitate a request for European support by Madrid.”
Mr. Rajoy has been debating whether to tap into a new bond-buying program proposed by the European Central Bank. While such additional help would considerably alleviate Spain’s debt problems, Mr. Rajoy finds himself in an increasingly tight bind between Spanish voters who oppose further cuts and investors and European finance officials demanding reassurance that Spain can meet budget deficit targets.
We sometimes lose sight of the forest in Europe thanks to all the trees. The adoption of the euro was the biggest political mistake in western Europe since 1945. It was a blunder of the first order, a catastrophic and completely unnecessary policy error that has plunged the world’s most prosperous region into economic disorder and political crisis.
Europe’s economic policy makers are not very good at economic policy; this is the central truth behind Europe’s euro agony and remains the most important thing to remember as we look at the continent’s options now. This is not because the individuals making policy are stupid; it is because the political and bureaucratic constraints on Europe’s cumbersome policy system where power is bizarrely and opaquely scattered between and among national governments, EU commissioners, councils, parliaments, a two headed presidency and a cluster of overlapping courts produces bad results time after time after time.
The single currency was such a terrible idea that it literally poses a threat to democracy in some countries like Greece and to the constitutional order in Spain, and the institutions and processes to which we must look for solutions are pretty much as dysfunctional and error-prone today as they were when the euro was adopted.
What the European system is good at producing is fudges: temporary measures that cover over profound differences and postpone trouble for a while. But fudges get progressively more expensive — not just in terms of money, but in their political and social consequences. Europe’s inability to make fast and effective decisions is taking an increasing toll.