The single currency was always an accident waiting to happen. Bailouts, such as the €100bn offered to Spain, are simply palliatives – what is needed is fundamental structural reform
At present, stereotypes tend to dominate debate around the eurozone crisis in which ‘feckless’ Greeks and ‘reckless’ Spaniards are bailed out by ‘virtuous’ Germans.
In fact, this ignores the reality, which is that Greece and Spain are victims of a single currency that is fatally flawed. Quite apart from denying weak economies the option of devaluation, the combination of a single currency with a multiplicity of budget processes (a) breaks the necessary alignment of monetary and fiscal policies, and also (b) excludes the inter-regional ‘automatic stabilisers’ that operate in ‘normal’ single currency areas.
The euro has (c) distorted competitiveness, (d) imposed inappropriate ‘one-size-fits-all’ interest rates on diverse economies, and (e) incentivised irresponsibility.
With such faults hard-wired into the system, the question was never ‘will a disaster ensue?’, but ‘what form will the disaster take?’ With the ending of the three-decades-long ‘credit super-cycle’ stirred into the mix, a banking (rather than a fiscal) disaster was always the more likely result.
Fiscal disaster has happened too, of course. Greek governments have spent too much, and taxed too little. Even here, though, Greek culpability has been compounded by a slump in competitiveness that has been caused, but not redressed, by the euro system.
Those countries that have profited from euro distortions – principally Germany – have a moral obligation, as well as huge self-interest considerations, for helping Greece on less draconian terms.
The main event, though, is not the Greek fiscal crisis, but the Spanish banking one. Even if so minded, the Spanish authorities could not have choked off the property bubble, because they were unable either to raise rates or to restrict the inflow of capital from foreign banks.
Having happily poured funds into the Spanish property sector in the good times, these foreign banks now want their money back in toto, leaving Spain’s banking sector to carry the entire toxic asset burden. Spanish banks behaved recklessly, but low interest rates, and the influx of cheap capital, played a significant contributory role.
The recapitalisation of the Spanish banks is welcome, in that it amounts to implicit recognition of this collective responsibility. The €100bn sum involved looks affordable. But rescues, however welcome, are little more than palliatives, when what is needed is fundamental structural reform.
If this doesn’t happen, the Medieval cartographers will have the final say. ‘Here be monsters’.
Dr Tim Morgan is global head of research at Tullett Prebon. This is an edited version of a Tullett Prebon Strategy Note