Southern Europe’s Woes, Failure of the Welfare State?

It is tempting for right-wing commentators to equate Europe’s debt crises with the failure of the welfare state which, across the continent, is becoming unaffordable.

Charles Krauthammer made this case on the Fox News’ Special Report last week. “In the end,” he said, “it took this horrible recession and financial collapse to expose that fact and to make it unsustainable.”

The problem with that analysis is that even core eurozone economies that are highly competitive, including Germany and the Netherlands, have welfare states that may be unsustainable in the long term. They have higher pension ages and less generous unemployment benefits but in both nations, government spending accounts for roughly half of gross domestic product. But they’re not drowning in debt.

It not that they are welfare states that sets the high debt nations of Southern Europe apart. It is that, far more than is the case in the north, the existence of extensive welfare provisions has fomented an entitlement mentality in the region that, in combination with a political system that is prone to clientalism if not outright corruption, makes for a deadly cocktail of decline.

Sam Bowman of the free market Adam Smith Institute hints at this when he explains why Southern European governments are so hostile to the fiscal and market reforms (known as “austerity”) which they are expected to implement as a condition for financial support.

Clients of the state — the various interest groups comprising interconnected banks, public-sector workers, pensioners, subsidized and otherwise protected businesses and others — appear to be so embedded in the political fabric of the eurozone states that policies for the good of the country, such as orderly bank defaults or radical competitiveness reforms, are impossible.

It is not something that can’t be overcome. Sweden, during the 1990s, demonstrated quite convincingly that even a country that is deeply ingrained in a philosophy of collectivism, can escape the cycle of self defeating corporatism if push comes to shove.

The Greeks, the Spaniards and, to a lesser extent, the Italians don’t seem prepared to accept the sort of changes that the Swedes enacted at the time and which have made theirs one of the most competitive and prosperous economies in the world.

Asia Times Online‘s Spengler columnist, David P. Goldman, believes that the critical difference between north and south in one of mentality. He writes, “the Mediterranean countries combine a premodern hostility toward central government with a postmodern indifference to the national future.”

At just 1.4 children per female, Italy and Spain have some of the lowest fertility rates in the world, which is to say that its citizens are unlikely to sacrifice their pleasures and prerogatives for a national future to which they do not contribute by raising children. Neither country’s elite evinces a sense of national obligation. To pay taxes is to play the fool.

This certainly applies to Greece in great measure where tax evasion is rampant and millions voted for a political party that promised to tear up the terms of the country’s €130 billion bailout even if they wanted to remain part of the euro.

But Spengler also points out that there is an exception. In Portugal, voters seem by and large resigned to the austerity measures that are being implemented in exchange for a €78 billion bailout. Portugal’s labor participation rate is much higher than Greece’s while the informal sector is smaller, something Spengler sees as evidence of a greater “public spiritedness” on the part of the Portuguese people.

So it’s not just the welfare state nor can we blame Southern Europe’s problems on a Mediterranean sense of civil duty (or lack thereof) for Portugal stands out. Then what?

Spain Downgraded, Bank Bailout Expected Soon

Spain is expected to formally request European financial support to bail out its banking sector over the weekend, making it the fourth eurozone economy to need outside help.

The move comes after the Fitch rating agency downgraded Spain’s sovereign credit rating by three notches on Thursday, highlighting the country’s banks’ high exposure to bad property loans and the risk of contagion from Greece’s debt crisis.

Spanish banks were weakened by the bursting of a property bubble in 2008. The European debt crisis has put further pressure on the nation’s financial institutions. Read more “Spain Downgraded, Bank Bailout Expected Soon”

Berlin Really Doesn’t Want a European Banking Union

German parliament Berlin
Facade of the Reichstag building in Berlin, Germany (Unsplash/Fionn Große)

German chancellor Angela Merkel signaled on Monday that she may be willing to support the creation of a European banking union to stem the continent’s spiraling debt crisis.

The proposal to create a pan-European banking authority that ultimately guarantees deposits throughout the European Union was floated by the European Commission last week and has since been embraced by highly indebted nations in the periphery of the eurozone, including Spain, which see it as a solution to the anxieties that pervade in their financial industries. Read more “Berlin Really Doesn’t Want a European Banking Union”

Spain Asks European Help to Recapitalize Banks

Spain’s finance minister, Cristóbal Montoro Romero, admitted on Tuesday that his country needs outside help to prop up its banking sector. “What we need is for the European institutions to get going and seek that bank recapitalization through those procedures that mean more Europe,” he told Onda Cero radio.

Montoro also said that Spain is effectively shut out of capital markets because of the high interest rates it pays on its bonds. “The risk premium says that as a state we have a problem in accessing markets when we need to refinance our debt.”

Spain will have to refinance some €82 billion of debt this year while helping its regions to repay maturing debts of about €16 billion in the second half of 2012. Read more “Spain Asks European Help to Recapitalize Banks”

Spain’s Economic Climate Not Reflecting the Season

With summer fast approaching, millions of holidaymakers will make the annual trip to favored destinations in Spain including the southern region of Andalucia, the Canary Islands and the capital of Madrid. These are just three of the eight places that have been placed for a downgrade by rating agencies across Europe and beyond however. The creditworthiness of some regions now borders on junk status.

Spain has not had the best of luck in the economic game in the last year. It has now become the second main threat to the euro after Greece.

Investors and wealthy Spaniards have been pulling their money out of the banks and moving it to financially more secure countries. The scale of the removal of funds is unprecedented and will do no good to help the country’s public finances.

News that the banking giant Bankia needs a €19 billion bailout has been met by the government with a rescue package but the markets have shut the door on Spanish agencies that need assistance due to the sheer size of the debt buildup and the likely need for further bailouts.

Despite reassuring investors and other countries alike that Spain will maintain its economic sovereignty and not require a bailout that could cripple the single-currency union, Prime Minister Mariano Rajoy will be hard pressed to get more of his own workers.

Spiraling unemployment has led to a stubbournly high 24.4 percent of the working population being out a job. The figures regarding the youth who cannot find a place of employment is almost double that.

The government will attempt to slash the deficit to a mere 5.3 percent of economic output this year and down further to 3 percent the following year. With the economic climate currently battering Spain’s investment worthiness, this will be an ambitious feat to manage even in what has always been the most financially productive time of the year for the country in a foreign investment context.

Respite for Spain, Fiscal Challenges Remain

The European Commission offered Spain an extra year to reduce its budget deficit on Wednesday and recommended direct aid for its ailing banks from Europe’s permanent financial rescue mechanism.

Olli Rehn, the commissioner for economic and monetary affairs, said that Brussels was prepared to give Spain until 2014 to bring its deficit down to the treaty limit of 3 percent of gross domestic product if Madrid reins in overspending by its autonomous regions.

Rehn appeared cool though to permitting the European Stability Mechanism, which is expected to take over from the temporary bailout fund this summer, to lend directly to banks. He pointed out that this this is “not foreseen as such in the treaty and therefore this is not an available option.” Frugal stages like Germany are wary of the proposal but Spanish prime minister Mariano Rajoy immediately backed the European Commission.

Spanish banks were weakened by the bursting of a property bubble in 2008. The subsequent European debt crisis, combined with growing uncertainty about Greece’s survival in the eurozone, have put further pressure on the country’s financial institutions. The government’s borrowing costs are also mounting.

A bank rescue plan offered by Madrid would issue bonds to inject funds into the nationalized lender Bankia but with interest on Spanish sovereign bonds over 6 percent, close to levels at which Greece and Ireland were forced to seek international bailouts, that efforts seems incredible unless other European countries support it.

The banking sector is Spain’s immediate worry but a far greater challenge looms in its largely autonomous provinces. Catalonia, Spain’s wealthiest region, asked the central government for financial assistance this week to repay its €13 billion debt.

In Spain’s highly decentralized system of government, the provinces account for more than half of total public spending. Even in regions where Rajoy’s conservative party is in government and has been for years, the financial difficulties are pressing.

Spanish regions have committed to find over €18 billion of savings by the end of this year, almost half of Spain’s planned deficit reduction, but given their past record, “the regions are unlikely to deliver,” writes Vincenzo Scarpetta in City A.M., “meaning that the central government would have to pick up the slack.”

This would put further strains on Spain’s public finances which will need much of the ammunition at their disposal to deal with potential future bank bailouts.

Rajoy commands large enough of a parliamentary majority to pass political reforms that would enable the central government to take control of the regions’ finances but areas like Catalonia and the Basque Country in the north are highly nationalistic and would likely resist any changes that dilute their autonomy.

Spain’s economy is barely expanding. One out of five workers is unemployed. Among the young, the jobless rate stands at over 50 percent. If if slumps further, other European countries could be convinced to provide financial support although Rajoy has ruled out a bailout.

With an economy twice the size of Greece, Ireland and Portugal combined, countries that have previously received bailouts, a debt crisis in Spain would severely test Europe’s ability to maintain economic stability and could threaten the future of the eurozone.

Ireland, Spain Cast Doubt on Europe’s Austerity Pact

When Europe’s leaders committed themselves to stricter budget discipline in December, it was hailed as a victory for prudent Germany which had insisted that the only long-term solution for the continent’s debt woes was fiscal consolidation. Three members of the currency union could yet challenge that proposition.

Irish voters will have their say on the fiscal treaty in May or June. Where their government, composed of conservatives and Social Democrats, supports the treaty and likes to portray the referendum as a vote for or against Europe, the left-wing opposition has dubbed the fiscal compact an “austerity treaty” and will seek to rally nationalist sentiment against what it perceives as Germany dictating fiscal policy to the rest of the eurozone.

The threat of an Irish “no” previously necessitated the rewriting of a European constitution treaty in 2005 after Dutch and French voters rejected the charter in referendums. The Irish voted against the revised Lisbon Treaty in 2008 but voted for it in a second referendum a year later. Read more “Ireland, Spain Cast Doubt on Europe’s Austerity Pact”

Fortress Under Siege? Gibraltan Sovereignty in Jeopardy

View of the Spanish city of Ceuta from Gibraltar, January 30, 2011 (José Rambaud)

In Foreign Policy this month, it was hinted that, along with the Falkland Islands, the tiny peninsular of Gibraltar, located on the southernmost tip of the Iberian Peninsula, may become a high-profile case for sovereignty discussion between Britain and a foreign power, in this case, Spain.

This comes in tandem with a recent increase in tension concerning the aforementioned Falklands and the bid by the Argentine government to take the matter of their sovereignty to the United Nations. Read more “Fortress Under Siege? Gibraltan Sovereignty in Jeopardy”

Europe “Essentially Makes Keynesianism Illegal”

European leaders on Monday prepared to enact a fiscal pact that will write balanced budget rules into their national laws despite British opposition to such far-reaching fiscal integration. “To write into law a Germanic view of how one should run an economy and that essentially makes Keynesianism illegal is not something we would do,” was how one official from the island nation put it.

Britain effectively deserted the Franco-German led push for economic integration in December when Prime Minister David Cameron vetoed a pan-European reform effort. The seventeen nations in the single currency area will move ahead nevertheless. Most other European Union member states, except Great Britain, are expected to join them, if not formally then de facto. Read more “Europe “Essentially Makes Keynesianism Illegal””