Euro crisis: the twilight zone | Editorial
A frightening situation has been visited upon ordinary people in 17 countries, who now await a dreadfully macabre twist
So now we know what €100bn buys you: five days. It’s taken less than a week for financial markets to pass judgment on Spain’s bumper rescue package – and they’ve pronounced it a failure. At least, that’s the most obvious conclusion to be drawn from Thursday’s turmoil. On the markets, Madrid saw its borrowing costs soar to their highest level since the birth of the euro. When Rome turned to markets for a three-year loan on Thursday morning, it had to pay an interest rate of 5.3% – up from below 4% just a month ago. Many superlatives were being used to describe this situation, but let us leave it at this: when euroland governments agreed last Saturday to bail out Spanish banks to the tune of €100bn and prime minister Mariano Rajoy ill-advisedly described the deal as a “triumph”, this was not what they had in mind.
Euroland has finally entered the twilight zone: an extraordinary, frightening situation has been visited upon ordinary folk in 17 countries, who now await a dreadfully macabre twist. This judgment can be defended in two ways. First, Spain is now paying over 7% for a 10-year loan – the interest-rate level reached by Greece, Ireland and Portugal at which they were each forced to seek a lifeline from the IMF and Europe. Second, Spain’s economy is twice the combined size of those three other nations – there must be very real doubts about whether the eurozone or the IMF have the resources to rescue it, let alone Italy which is a crisis on the boil.
The next big turn in the eurozone saga is not far away. Greece holds another general election this weekend, and whichever party or coalition emerges from it will be forced to demand a relaxation of its austerity programme. Not just the leftwing Syriza coalition, but even the centre-right New Democracy will have to do so – or risk the kind of popular unrest that will make the country ungovernable. And they will have some justification for doing so, since the eurozone granted Spain its €100bn loan with barely any conditions. The sad truth for Greece is that a mere cessation of the austerity programme won’t stave off a decade-long depression; what’s needed is the kind of stimulus programme that it cannot afford and the eurozone won’t pay for.
For the rest of the euro club, and the world, this mess will drag on without resolution – but with plenty of buck-passing. Just listen to George Osborne, who made his Mansion House speech and regularly blames the euro crisis for killing his recovery. The chancellor could afford a serious fiscal stimulus, as shown by the ease with which the UK on Thursday took out a 48-year loan at just 3.3% interest. Sadly, he has wedged himself so tightly into the austerity corner that the Treasury relies instead on desperate schemes to increase business lending. Yet one lesson of the latest Spanish debacle is that markets can see through even the most costly flight of fancy.