Impending Catastrophe: Spain Has Entered A Full-Scale Collapse And Created A Tremendous Amount of Instability Which Could Trigger An Imminent Lehman-Like Event And A Rerun of The Great Panic of 2008

Friday, September 28, 2012
By Paul Martin
September 28th, 2012


Less than a year after sweeping to power in a landslide victory, Mr Rajoy is already fatally wounded. He promised never to apply taxpayers’ money to bailing out the banks. He already has. He promised not to follow Greece, Ireland and Portugal into a sovereign bail-out. Now, other than leaving the euro, he’s got no choice. Even on gay marriage, Mr Rajoy has failed to deliver as promised.

A further €40bn package of austerity measures has been announced in a desperate bid to get ahead of what Brussels wants of Spain and, we must suppose, thereby obtain a somehow unconditional bail-out, allowing national pride to be salvaged. These measures are almost bound to be self-defeating, for they threaten further to shrink the economy, thereby making deficit reduction tougher still. Spain is chasing its tail into austerity-induced fiscal and economic meltdown. Mr Rajoy is a dead man walking.

Other than leaving monetary union and defaulting on its euro debts, which for the moment even the rebellious Catalans don’t seem to want, is there any way out for Spain? The answer looks ever more likely to be no.

Membership of monetary union is preventing the application of appropriate monetary policy to the periphery sovereigns. The single currency has also denied Europe the natural market mechanism of free floating exchange rates to correct deficiencies in competitiveness and reduce external indebtedness.

There is only one conclusion to be drawn from all this; though the short-term costs would be profound, Spain must leave the single currency.

Spain is damned if it leaves, but damned for eternity if it stays. Eurozone policy as it stands offers no plausible way back to prosperity.

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