Greece is a Distraction, Spain is the Real Deal

Spanish Prime Minister Mariano Rajoy gestures during a press conference in Madrid on May 28, 2012.


Back when I was pushing the idea that we shouldn’t believe the hype about Greece leaving the euro, a friend characterized my position as “optimistic.” But I wasn’t an optimist, either about Greece or the eurozone. My point, rather, was that Greece was small fry. Cutting Greece loose would mean big problems for the whole project, and making the Greek bailout a bit more generous would be pretty cheap and easy.

Where the problems get really big are with Spain, which is rightly back in the headlines today.

Here’s the deal with Spain. Lots of Spanish found themselves insolvent after Spanish home prices started tumbling, which has required a lot of bailouts. But the Spanish government lacks monetary sovereignty and isn’t a safe haven. To fully recapitalize Spain’s banks would bankrupt the Spanish state. And a bankrupt Spanish state would have to leave the eurozone, which would destroy Spain’s banks. So Spanish people are afraid of Spanish banks and want to get their euros out of them and into cash or safer banks in Germany. But the run on Spain’s banks increases the need for bailouts. And yet unlike Greece, Spain is not small and an externally financed bailout would be very expensive.

What’s more, I don’t think anyone has deluded themselves into the idea that the eurozone could survive Spain leaving. If Spain goes, it all goes.

So this is the real moment of truth. Turning the United States from a collection of rebellious colonies into a unified democratic republic involved a massive bailout of the more indebted states and the introduction of a whole new constitution. It was a big deal and the financial transfers involved were not in any clear sense “fair.” But the United States of America was a political project, and that’s what it took to make the project work. With Spain, things come to a head. The logic of the European project is a very expensive and not particularly conditional bailout aimed at ensuring the existence of a functioning banking system across the continent. The logic of protecting the concrete interests of German taxpayers is to not do that—let the Spanish fend for themselves and let German foreign aid money go to help genuinely poor countries rather than rich ones that happen to be located nearby.