Published on July 30th, 2012 | by Katharina Obermeier
Image © [caption id="" align="alignnone" width="566"] © Adam Foster[/caption]   One of the most crucial aspects of a relationship – whether it is between two people, between economic partners, or between a government and the citizens who elected it – is trust. When it comes to personal relationships, this is accepted wisdom – any relationship counsellor or women’s magazine will tell you that a relationship cannot work without trust. The same is true for political and economic relationships, though it is not as widely discussed. Nowhere is this clearer than in the political response to the eurozone crisis, and especially the recent flare-up in Spain, which could become a poster child for the problems brought about by a lack of trust. The Spanish government has desperately been trying to counteract the crippling effects of its disintegrating banking system and highly indebted regional governments, but it looks like it has started losing the race against time. Its borrowing costs shot up to dangerously high levels over the last week, and observers are worried that the €100 billion bail-out for Spanish banks agreed last week will not be enough to save the country from bankruptcy. This in turn has put strain on the financial markets, even causing rating agency Moody’s to downgrade its outlook for countries such as Germany, the Netherlands and Luxembourg, which have previously been considered economically stable. Not surprisingly, this turn of events has heightened tensions between the member states of the eurozone, as well as between the governments and their citizens across Europe. Most visible, of course, are the Spanish people, who are gathering in mass protests against their government’s policies. At the heart of the matter are the actions of the Spanish government itself. Embattled Prime Minister Mariano Rajoy has wavered back and forth between denial, attempts to implement austerity measures to bring down the deficit, and populist speeches intended to soothe Spain’s enraged citizens. It is hard to blame him for wanting to gain the trust of both the financial markets and his electorate – but the result has been confusing, mixed messages that have failed to instil confidence concerning Spain’s situation in the markets. In the end, this will only lead to further deterioration of the country’s economy, and harder times for its population. This is where the importance of trust comes in: unlike, for example, the Monti administration in Italy, the Spanish government has failed to build a healthy relationship with its citizens, which would have inspired trust in its policies and aided the reform process. Its inability to see through constructive and coherent policies in areas such as banking reform has made markets wary and distrustful of its promises, putting the country in an even more precarious position. The difficulties Spain has faced in this regard underline a central principle of the way financial markets work: often, it is less about economic health and more about guarantees which increase confidence for investors. Again, it is about trust. If, as is becoming increasingly evident, the Spanish government is unable to provide these guarantees, who can? The EU institutions are the obvious choice, but any action on their part depends on the will of the member states. And unfortunately, among eurozone member countries, what little trust was there initially is rapidly eroding, with national politicians openly calling for a Greek exit from the eurozone or turning their backs on intergovernmental agreements intended to prevent the kind of calamity we are seeing in Spain. In the end, it may come down to the European Central Bank, whose chief Mario Draghi has just announced that it will do “whatever it takes” to save Spain and the euro. But even if the ECB is able to provide the kind of guarantees that will restore investor confidence in the eurozone, it is unlikely that Rajoy will be able to use this to salvage his own relationship with his electorate.