MADRID | The injection of public money and nationalisation of Bankia ends a compelling need with a solution, earlier discarded, that in the US or the UK has been long ago adopted but neither the Germans or the French want to face, in spite of many of their banks being as weak as some the Spanish entities may be.
François Hollande’s arrival to the presidency of France is also good news: it’s the victory of the survival instinct of citizens who are suspicious about the virtues of austerity and recession, and fear it all will end with a deeper depression.
Prosperity is not, and neither was in 1929, just around the corner. In fact, the European Central Bank has simply managed to avoid that the markets crushed Spain and Italy. That relief and increase of the ECB’s balance sheet after opening liquidity windows pose no inflationary threat, yet it would have been better to have directly monetised government debt without going through the circuit of the banks (in emergencies, several articles of the European Union’s Treaty provide convincing legal basis); we would now know more about our financial institutions’ health.
The time has come for the European Stability Mechanism to start works or, while its engines are being greased, for the ECB to keep in the medium term afloat the debt balances of member states. Stability Pacts were established in times of inflationary threats. The unions were strong and the national economies productive, especially labour force-wise. Now the opposite happens. Unemployment is extremely high and there is only a remote possibility of an inflationary outbreak.
Please, note that the productive capacity of the real economy is largely intact but it needs credit and the return of investor confidence to the markets.
Does the ECB or any expert really doubt the resilience of Spain, for example, and its ability to repay its debts? How could anyone refer to Spain as an insolvent nation when between late 2008 and 2011 it has neatly cut down the deficit on the current account of its balance of payments from 10% of GDP to below 3%? (moreover, a deficit that is consequence of interest payments on past debts, because Spain’s balance of goods and services is in surplus with EU countries and in balance with the rest of the world). This ‘current account reversal’ has almost no precedent in any developed country.
Mr Rajoy and his government, though, must replace provincial rhetoric and join the common front of the Italians and the French. With haste and without pause, Spain’s cabinet must build bridges with all political and social actors, and find the rigour and courage the moment requires.