What would happen if Spain follows Ireland over the edge?

On Monday the big news of the day was the Ireland bailout. Yesterday, the follow-on story was Portugal’s general strike which could push the country over the edge. But the nagging doubt in everyone’s minds in the European power-centres today will be neither: it will be the much worse possibility, remote or otherwise, that Spain might follow: Spanish euro spreads reached a record 260 basis points yesterday, making it is very expensive for Spain to borrow.

Rob Marchant is a management and communications consultant, blogger and eco-entrepreneur; he previously worked as a Labour party senior manager through the 2001 and 2005 general elections. Rob blogs at The Centre Left

On Monday the big news of the day was the Ireland bailout. Yesterday, the follow-on story was Portugal’s general strike which could push the country over the edge. But the nagging doubt in everyone’s minds in the European power-centres today will be neither: it will be the much worse possibility, remote or otherwise, that Spain might follow: Spanish euro spreads reached a record 260 basis points yesterday, making it is very expensive for Spain to borrow.

There are enormous issues at stake here; in the worst-case scenario that Spain is bailed out, there is firstly a major problem which Ireland did not have – Eurocrats are concerned they will not have enough funds to pull it off.

Spain is a much larger economy – the world’s ninth-largest – compared with tiny Ireland. The potential impact on the euro is immense, and could threaten its very survival.

Spain under José Luis Rodríguez Zapatero has weakened economically for many reasons, some of it his fault, such as Spain’s failure to sort out its inflexible and two-tier labour market. Some of it isn’t his fault, such as Spain’s over-reliance economically on the construction sector – but he is very unpopular at home and, worse, is at the centre of a confidence problem on international markets, as they don’t really believe he will do what’s necessary to bring the economy back to growth.

The governor of the Bank of Spain – perhaps somewhat unhelpfully – says that Spain needed to be:

“… capable of convincing [the rest of the world] that we are capable of doing what we said we were going to.”

Which they clearly are not. And one European bank, Saxo bank, has already predicted that:

“…Spain would be bailed out during 2011.”

So, Spain really could go. And, if it goes, the fallout will be huge. But the question of whether it goes or not is really a policy one at this point but a mathematical calculation on two questions. Are the funds supporting it deeper than the speculators’ pockets?  And are governments prepared to support it no matter what?  If the answer to either of these questions is “no”, we have a big problem.

The lesson for Britain? The realpolitik is that we are where we are:  it is not in our interests either for the euro itself to fail, or to suffer a massive fall in value as it tries to right itself. The impact of this on British interests, so closely linked in to the fortunes of the eurozone by trade ties, would surely be off the Richter scale, as it would for all other EU countries.

Now, there are two good reasons why people might sympathise with a “do nothing” policy: it creates what economists call “moral hazard” and will disincentivise countries to behave themselves in future; and, after his widely criticised management of the economy over the past six years, Zapatero hardly seems to deserve a political boost to save his government.

These arguments we can hear out, although they seem to be clearly overridden by the immediate imperative of saving the euro. What we should not do, however, is pay attention to what is probably uppermost in Mr Cameron’s mind – the opinion on his back benches that Portugal, Spain and the euro should be hung out to dry. In short, Mr Cameron must support European governments in continuing to support the euro – because if it fails, the results could be catastrophic for Britain, especially in its current, delicate state.

So, where does Mr Cameron actually stand on the issue? Well, despite his warm words in support of his Irish colleagues, his real opinion seems to be more summed up his post-election statement:

“[Britain] … would not be agreeing to any agreement that drew us further into supporting the euro.”

And, obviously, it doesn’t really fit well with his austerity agenda to be seen to give handouts to admittedly fiscally incontinent countries. Especially in Europe, the bane of his party. It is to be hoped – perhaps against the odds – that he’s secretly on the phone to Angela Merkal, Nicolas Sarkozy and Silvio Berlusconi as we speak, trying to get together a big enough fund to see off the speculators. Because we are, as someone recently said, in this together.

We can act now and sort out the moral hazard later; or, alternatively, pass by on the other side of the road and end up picking up the pieces.

20 Responses to “What would happen if Spain follows Ireland over the edge?”

  1. Shamik Das

    RT @leftfootfwd: What would happen if Spain follows Ireland over the edge? http://bit.ly/gFHpRt asks @Rob_Marchant http://myloc.me/eAuxs

  2. Jen Wilton

    RT @leftfootfwd: What would happen if Spain follows Ireland over the edge? http://bit.ly/gFHpRt asks @Rob_Marchant

  3. Rob Marchant

    RT @leftfootfwd: What would happen if Spain follows Ireland over the edge? http://bit.ly/gFHpRt asks @Rob_Marchant

  4. digby

    RT @leftfootfwd: What would happen if Spain follows Ireland over the edge? http://bit.ly/gFHpRt asks @Rob_Marchant

  5. reded

    Or do everything we can to ensure the failure of the western banking system and return the power to the people. How about that? Is that not a valid option?

  6. mtperu

    Here is an interesting proposal for UK banking reform submitted to the Independent Commission on Banking:

    http://www.positivemoney.org.uk/2010/11/positive-moneys-submission-to-the-independent-banking-commission/

  7. Rob Marchant

    If Spain falls http://bit.ly/idNdqa #eu #spain – my article on @leftfootfwd

  8. Rob Marchant

    Reded, respect your opinion but am not sure what you would do next in the absence of a banking system.

    Mtperu, interesting proposal indeed. But not much to do with the EU bailing out Spain!

  9. reded

    Set up nationalised banks that serve the people not the elite? Or are we just too feeble to run our country for the benefit of those who live here? You could be right, please Mr Capitalist, please let us have some crumbs from your table, we can’t manage our own affairs for our own communal good.

  10. Wendy Maddox

    More bailouts even though useless: RT @leftfootfwd: What would happen if Spain follows Ireland over the edge? http://bit.ly/giEAxH

  11. Rob Marchant

    More on the Spain/Ireland in this article I have just found on the NS website: http://www.newstatesman.com/economy/2010/11/ireland-irish-spain-european

  12. Spir.Sotiropoulou

    RT @leftfootfwd: What would happen if Spain follows Ireland over the edge? http://bit.ly/giEAxH

  13. Anon E Mouse

    reded – Your proposition hasn’t worked anywhere else in the world. Why do you think it would work here?

  14. reded

    Len McCluskey: “Neoliberalism has failed”. Time to try marxism before the west is completely destroyed.

  15. Anon E Mouse

    reded – This is supposed to be a serious blog and you give quotes from Len McCluskey? He says “Neoliberalism has failed”. So what? And?

    Marxism – socialism blah blah has been tried and failed all over this planet…

  16. Rob Marchant

    AnonEMouse, I am not sure if you are equating Marxism with socialism but I’d have to disagree with you if you are. But I agree with your other comments.

    Reded: Sorry, but I have no idea who Len McCluskey is. Marxism is dead – this is a blog of the centre-left, unless I’m much mistaken.

  17. Rob Marchant

    Tories should crow a little less about euro – Economist's great article http://econ.st/hIqdDA + my earlier LeftFootFwd http://bit.ly/eY0nmQ

  18. Rob Marchant

    Finally, a fantastic article here http://bit.ly/hIqdDA from yesterday’s Economist, saying something very similar about the Tories. Very interesting from a magazine which, on economic issues at least, is hardly aligned with the bulk of Labour thinking.

  19. blogs of the world

    Rob Marchant outlines the disastrous consequences for Britain and Europe if Spain follows … http://reduce.li/y9bvcb #follows

  20. Rob Marchant

    @jonworth Fair enough, wanted to canvass opinion. My thoughts here: http://bit.ly/eY0nmQ

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