Update on the European Monetary Union: Spain, Italy, Greece

Developments have been occurring rapidly in the ongoing crisis in the European Monetary Union since my last update.  First, Spain asked the European Union for and received a bailout of its banks.  However, the move undermined confidence in the ability of the Kingdom to repay its sovereign debt, which, along with the ongoing debt crisis in Greece, caused its borrowing costs to spike, as did the Italian Republic’s, despite the reforms that both the Spanish and Italians have successfully implemented and the progress they have made in reducing debt, despite their anemic growth.  In the latest example, the Italian parliament approved a controversial labor reform law, according to ANSA, that gave businesses more flexibility in firing workers, although the measure was diluted.  It was proposed by Prime Minister Mario Monti as critically necessary for Italian fiscal and economic health.

The two Southern European states demanded that the more fiscally responsible Germans and other Northern Europeans agree that the European Central Bank make available loans to ease Spanish and Italian borrowing costs.  They argued that because of their good behavior, they did not deserve to pay higher interest rates, unlike Greece, which is in worse fiscal condition and has not met its commitments.  Investors in sovereign debt have demanded high interest rates for bonds issued by the two states as a premium for higher perceived risk as the crisis continues.  The loans would not represent an embarrassing bailout – with the usual heavy oversight –  because Spain and Italy have complied fully with all the demands of the Europeans to improve their fiscal condition.  The Germans have acceded to the demands, as long as the Spanish and Italian governments continued to reform, as Spain and Italy, with their large economies, are recognized as the European Union’s firewalls against the contagion of debt from Greece and others. There will also be some consideration given to Ireland for a similar deal. 

Meanwhile, the second parliamentary elections in Greece averted the crisis, for now, of a Greek exit from the Euro.  Although the far-leftists who had done well in the first election had promised to keep Greece in the Eurozone, their demand to renegotiate the Greek bailout by the European Union was recognized as what would have been a breach of the terms of the deal that would have resulted in a Greek default on debt and subsequent exit from the Monetary Union.  The conservatives, who had backed the bailout and its necessary harsh conditions of austerity, won a plurality and were able to from a new government with the third-place socialists, the same two parties who were previously in a coalition government before the last election.  The victory was achieved despite the deep five-year recession and the record of overspending and budgetary dishonesty of both parties that had resulted in the crisis in the first place, as well as the unpopularity of the austerity measures. 

Nevertheless, by the time the new government was formed, it had become apparent that new terms of the bailout would have to be negotiated, such as an extension of the length of the term in order to reduce the Hellenic Republic’s borrowing costs, as well as other measures, such as some tax cuts and increases in pay in order to ease the pain of the recession and spur economic growth, which, in turn, would improve Greece’s fiscal health.  As a result, the withdrawal of funds from Greek banks has reversed and Greeks have begun to file tax returns more than before.  The European Union is open to modifying the deal, but only if Greece continues its austerity program to reduce its debt.   The elections and formation of a government have reassured the markets somewhat because of the aversion of a disorderly Greek exit from the single currency, but the future of Greece in the Eurozone remains unresolved not only until the bailout is renegotiated, but also whether or not the Greek government is successful in reducing its sovereign debt. 

The more liberal Europeans have argued for greater European integration to resolve the crisis, while the more conservative Europeans have resisted paying the debts of their profligate spending neighbors, as I have posted previously.  What is remarkable is how the left argues for more integration – “more Europe” – even as the grand project of European integration has been revealed as the reason the crisis has worsened and become continentalized.  To them, there was never enough European integration in the first place, as the problems were only caused by mistakes in establishing the union.  It reminds me of liberal Americans who argue that the trillions of dollars spent on poverty alleviation efforts that have been exposed as catastrophic failures were simply not enough and that far more is needed.  To the left, it is never enough.  It will be, however, when the money runs out.