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German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy

Spectre of Spanish bailout

The banking union agreed by European leaders on 18 October is just one of a set of measures that also includes supervision of national budgets and a greater role for the ECB. And the goal of these manoeuvres is to determine if, and how, Spain will ask for help.

Published on 19 October 2012 at 15:51
German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy

Will President Mariano Rajoy decide to ask for the second bailout of the Spanish economy at the new European summit that started yesterday in Brussels? That’s the million-dollar question. At the risk of having to correct myself tomorrow, my feeling is that he will not.

The reason is not, in my opinion, as is often said, that Mariano Rajoy is indecisive, constantly plucking petals off a daisy. The most plausible reason is that he has grasped that the bailout has a lot in common with a poker game, which is a game where you have to learn how to hide your cards and play them well and force other players to show theirs. And, at this summit, he is surely not going to learn what hands they are holding.

Spanish debt and the Franco-Prussian tiff

Many people in Spain, notably the financial elites, believe that there is no card to play and the best thing to do is ask, once and for all, for the bail-out. Leaving aside the fact that many of them are backing the bailout because they are faring very well in their businesses and know that they will not be paying for the terms of a bailout, the fact is that Spain does indeed have a card to play.

Although there are reasons to criticise the government for the way it is handling the crisis, let me raise a voice in its favour. Mariano Rajoy has grasped that the bailout card does gives him some wriggle room, but before showing his hand he has to force the other players to reveal their own: the European banking union, the new rescue fund, intervention by the ECB, or supervisory power over national budgets.

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Germany does not want to play the banking union card (possibly because its banks are like Swiss cheese) and prefers to play the card of Europe-wide supervision of national budgets by a European Union super-minister. France opposes that, as it has no desire for German hegemony and is demanding that the banking union be in place first. In this new Franco-Prussian war, the kicks the combatants are meting out to each other are falling on Spain’s behind.

In fact, the high premium on Spanish debt, i.e. the additional costs that the Spanish Treasury has to pay to finance itself, are not down solely to the Spanish disease, but to the Franco-Prussian tiff that is threatening the euro. Part of this excessive cost is caused by the fears of investors that the euro will end up collapsing. As we have seen, ever since Mario Draghi declared that the ECB would do everything it took to save the euro the Spanish premium has been going down, which is a clear sign of the contagion effect of the euro.

Game of poker

Although the ECB says it is willing to intervene, however, that requires being requested to intervene by the interested parties. It's as if a public hospital, whose function is to act on its own initiative in cases of contagious infection, were to demand that it be asked to do so by those infected. It’s senseless. On the other hand, we do not even know how the new European rescue fund will take action and what kind of firepower it can muster.

That said, we’re looking at a complex game of poker. Spain should not show its card until the others have flourished theirs. This won’t happen, though, not even at this summit.

Comment

Bailout held hostage by Paris and Berlin

“The bailout of Spain is hardening the standoff between Germany and France,” leads El País after the first day of the European Council —

The bailout is just around the corner, almost fully formalised and waiting only on the electoral calendar in certain countries [...] Spain is resisting it, though, because Berlin continues to be Rajoy’s great fear. The German executive wants to hold in reserve a last trump card regarding the terms, to tighten the screw or to cede some ground and be a little more flexible, which is what Madrid is demanding.

There’s also a new pattern of confrontation between France and Germany, the daily writes, noting that President François Hollande has accused Chancellor Angela Merkel of delaying the start of the banking union until 2014 “out of electoral interests”, in view of the German elections slated for the autumn of 2013 —

On most of the major issues, Berlin and Paris differ. France wants an immediate bailout of Spain, while Germany prefers to wait. France wants the chapter and verse of the June agreement on union bank to be respected; Germany has succeeded in upholding its own interpretation. And so on, ad infinitum. Although the arrival of Holland has assumed a certain rebalancing of power in Europe, the euro is a kind of economic competition in which Germany clearly comes out the winner.

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