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Published on June 21st, 2012 | by Katharina Obermeier
Image © [caption id="attachment_10455" align="alignnone" width="566"] The Greek and Spainish euro: Two different sides of the coin. © Katharina Obermeier[/caption]   Another month, another bail-out. This time Spain is the victim, or culprit, depending on your attitude towards the economic crisis. The news of the bail-out has shaken markets and investor confidence and has cemented the on-going sense of gloom surrounding the eurozone. With its unsustainable level of debt and fragile banking system, it is easy to see why Spain is commonly regarded as the new Greece, requiring the same assistance for the same problem. However, this view is misguided – not all bail-outs are equal and not all Southern eurozone countries fit the same stereotype. First of all, though the distinction was lost in less subtle news coverage, the bail-out that was announced last week for Spain is fundamentally different from previous ones for Greece. In the case of Greece, the EU and IMF lent money directly to the Greek government in order to prevent it from going bankrupt. The Spanish bail-out provides funds to Spanish banks in order to prevent them from collapsing, as there is a very real danger that this would trigger runs on banks which could end up destroying the country’s financial sector. While obviously Spain remains in a dire fiscal position, it is incorrect to view the EU’s contribution to its bank rescue fund as the equivalent of the Greek bail-out, or a “bail-out lite.” Unlike Greece shortly before its bail-out, Spain is still able to borrow from markets, albeit at dangerously high interest rates. Moreover, unlike Greece, Spain’s biggest problem is not its deficit, but its banking crisis which is fuelling its deficit. Economists and analysts have summed up the difference between Greece and Spain in two expressive sentences: “In Greece, it is the insolvency of the government that has sunk the banks; in Spain, the insolvent banks are sinking the government.” The Greek crisis was born of excessive government debt, developed over years and bolstered by systemic corruption, which became lethal when the sub-prime mortgage crisis spread to Europe and prevented the Greek government from continuing to borrow cheaply. By contrast, Spanish government debt levels were comparatively low in the run-up to the crisis. Instead, the country suffered a burst housing bubble – prices had soared artificially high due to the pre-crisis low borrowing costs and ready influx of foreign capital, which ended abruptly with the global economic crisis. Consequently, the banking sector was hit by large losses, credit froze up, the economy stalled and the government found its deficit increasing sharply. So while economic conditions in the two countries may look similar at the moment, the underlying reasons for their respective situations are very different. This in turn has produced two fundamentally different policy responses by EU leaders: lending funds to the Greek government to keep it from defaulting on its debt while it carries out structural reforms to reduce its deficit and providing loans to stabilise Spain’s failing banking sector. Continued ignorance and neglect of these important distinctions will only further obscure and misrepresent the eurozone crisis in the eyes of the public and some media outlets are not helping. The Telegraph recently took this to the extreme by putting out an article under the fantastically misleading headline “Spain and Italy to be bailed out in £600bn deal”. The article went on to completely contradict the headline by explaining that a proposal had been put forward at the G20 summit to use the European Stability Mechanism and European Financial Stability Facility funds to buy Spanish and Italian bonds as a way lower the dangerously high borrowing costs. Needless to say, this hardly constitutes a bail-out, and, even if it was agreed to, would be unlikely to use up the entirety of the funds from these two sources (£600bn). While many seem to be only too eager to see bail-outs in every item of news about the eurozone, looking at the differences in policy responses to various problems is vital when it comes to understanding the causes and consequences of the crisis.

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Bail-Out = Bail-Out?

The Greek and Spainish euro: Two different sides of the coin. © Katharina Obermeier

 

Another month, another bail-out. This time Spain is the victim, or culprit, depending on your attitude towards the economic crisis. The news of the bail-out has shaken markets and investor confidence and has cemented the on-going sense of gloom surrounding the eurozone. With its unsustainable level of debt and fragile banking system, it is easy to see why Spain is commonly regarded as the new Greece, requiring the same assistance for the same problem. However, this view is misguided – not all bail-outs are equal and not all Southern eurozone countries fit the same stereotype.

First of all, though the distinction was lost in less subtle news coverage, the bail-out that was announced last week for Spain is fundamentally different from previous ones for Greece. In the case of Greece, the EU and IMF lent money directly to the Greek government in order to prevent it from going bankrupt. The Spanish bail-out provides funds to Spanish banks in order to prevent them from collapsing, as there is a very real danger that this would trigger runs on banks which could end up destroying the country’s financial sector. While obviously Spain remains in a dire fiscal position, it is incorrect to view the EU’s contribution to its bank rescue fund as the equivalent of the Greek bail-out, or a “bail-out lite.” Unlike Greece shortly before its bail-out, Spain is still able to borrow from markets, albeit at dangerously high interest rates. Moreover, unlike Greece, Spain’s biggest problem is not its deficit, but its banking crisis which is fuelling its deficit.

Economists and analysts have summed up the difference between Greece and Spain in two expressive sentences: “In Greece, it is the insolvency of the government that has sunk the banks; in Spain, the insolvent banks are sinking the government.” The Greek crisis was born of excessive government debt, developed over years and bolstered by systemic corruption, which became lethal when the sub-prime mortgage crisis spread to Europe and prevented the Greek government from continuing to borrow cheaply. By contrast, Spanish government debt levels were comparatively low in the run-up to the crisis. Instead, the country suffered a burst housing bubble – prices had soared artificially high due to the pre-crisis low borrowing costs and ready influx of foreign capital, which ended abruptly with the global economic crisis. Consequently, the banking sector was hit by large losses, credit froze up, the economy stalled and the government found its deficit increasing sharply.

So while economic conditions in the two countries may look similar at the moment, the underlying reasons for their respective situations are very different. This in turn has produced two fundamentally different policy responses by EU leaders: lending funds to the Greek government to keep it from defaulting on its debt while it carries out structural reforms to reduce its deficit and providing loans to stabilise Spain’s failing banking sector.

Continued ignorance and neglect of these important distinctions will only further obscure and misrepresent the eurozone crisis in the eyes of the public and some media outlets are not helping. The Telegraph recently took this to the extreme by putting out an article under the fantastically misleading headline “Spain and Italy to be bailed out in £600bn deal”. The article went on to completely contradict the headline by explaining that a proposal had been put forward at the G20 summit to use the European Stability Mechanism and European Financial Stability Facility funds to buy Spanish and Italian bonds as a way lower the dangerously high borrowing costs. Needless to say, this hardly constitutes a bail-out, and, even if it was agreed to, would be unlikely to use up the entirety of the funds from these two sources (£600bn). While many seem to be only too eager to see bail-outs in every item of news about the eurozone, looking at the differences in policy responses to various problems is vital when it comes to understanding the causes and consequences of the crisis.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



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