Spain's Prime Minister Jose Luis Rodriguez Zapatero is the fourth head of government of the 17 eurozone countries in barely six weeks to lose his position as a result of the eurocrisis. Earlier Slovakia's Iveta Radicova, Greece's George Papandreou and Italy's Silvio Berlusconi were forced to resign. Last Sunday, Zapatero lost the elections after a campaign which was overshadowed by the worst economic crisis Spain has encountered since civil war in the 1930s.
Spain has Europe's highest unemployment rate – almost 23% of the workforce is without a job – and its highest youth unemployment – a staggering 47%. Spain's national debt is relatively low, but, with a budget defecit of 9% and hardly any economic growth, is rising rapidly.
In the decade following the introduction of the euro in 1999, Spanish competitiveness deteriorated by 33% against Germany's, while euro membership, by devaluation, prevented Madrid from correcting this. The real estate collapse of 2008 has left Spain with a collapse of real estate prices and 700,000 unsold new homes. As the real estate boom of the early years of this century were caused by domestic over-borrowing, Spanish banks are teetering on the brink of bankruptcy.
Last Friday, Spain was forced to issue €3.6 billion worth of 10-year bonds at a yield of 6.97% – a sharp rise from the 5.43% it paid last October and dangerously close to the 7% threshold above which funding costs are considered unsustainable. Greece, Ireland and Portugal all had to be bailed out by the other eurozone countries when they crossed the 7% threshold around which Italy and Spain are currently hovering.
According to Jamie Dannhauser, senior economist at Lombard Street Research in London, Spain should concern investors more than Italy because its banks are a far bigger liability than Italy's, and because it is in much graver difficulty with a budget deficit which, unlike Italy's, it will be unable soon to get under control.
Zapatero, who governed his country since March 2004, is largely to blame for his country's predicament. The Economist wrote that the Socialist leader has been a "reluctant convert to reform." This is an understatement. Zapatero is a far-left ideologue who was unexpectedly voted into office just three days after the al-Qaeda bombing of Madrid's Atocha train station on March 11, 2004. After Atocha, the Spanish voted the Conservatives out of power in favor of a Socialist Party, known for appeasing Islamic terrorists.
Zapatero, reelected in 2008, for almost eight years presided over an economy in which the private sector borrowed at an unprecedented scale. The Spanish were encouraged to live on borrowed money. As a result, Spain's rate of household debt to disposable income rose to 130%, compared to only 50% in Italy. With a debt largely provided by domestic banks and a private sector increasingly unable to repay, the government now has to foot the bill in order to avoid a collapse of the entire banking sector.
"Spain would enjoy better macroeconomic (and social) outcomes over the next decade or more outside, rather than inside, the single currency bloc," says Dannhauser. If Spain, suffering from excessive debt and low productivity, were no part of the eurozone it would be a Herculean task to revitalize its economy. Being part of the eurozone, however, the situation is even worse. Spain has no escape route at all and faces a decade or more of acute economic hardship. Even its new likely Prime Minister, the Conservative leader Mariano Rajoy, cannot make Spain's economy grow if the country remains burdened with an overvalued currency.
Unfortunately, neither the political elite nor the Spanish electorate want Spain to leave the euro. They regard the euro as the only currency which can guarantee the continuation of a welfare system which is beyond Spain's own means and they are blind to the fact that the euro is the rope that is about to strangle them.
Meanwhile, the euro contagion is affecting all 17 nations of the European monetary union. Last week, it became clear that the demand for sovereign debt is drying up all over the eurozone. Investors avoid buying any government bonds. Even triple-A rated countries such as the Netherlands saw their interest yields rise, leaving Germany as the eurozone's last safe haven. Even Germany, however, was unable to sell the full amount of the bonds it put out for sale last Wednesday. Apart from the European Central Bank (ECB), which buys sovereign bonds from countries such as Spain and Italy on the secondary market, no one seems interested in government bonds anymore.
European politicians are beginning to panic at the prospect of running out of money. The pressure on the ECB to start printing money is growing. Germany opposes the monetization of eurozone government debt which, it fears, might lead to hyperinflation. But Germany is becoming increasingly isolated, with France leading the demand to turn the ECB into a so-called "lender of last resort."
To counter this demand, Germany has launched a proposal for a new EU Treaty that will turn the eurozone into a "stability union" as a first step towards a political union. Not everyone in Germany, however, seems to agree with that solution, either. The draft of the German proposal was leaked to the eurosceptic British newspaper The Daily Telegraph. The leaked document shows that the German authorities are aware that the citizens in most European countries do not want the European Union to become a political union, which would involve a huge transfer of national sovereignty to the EU authorities in Brussels. In 2005, referendums in France and the Netherlands on the so-called European Constitution rejected the move towards a "United States of Europe" -- although a referendum in Spain showed 77% of the voters in favor.
The German document explicitly states that in order for the move towards a stability union and a political union to succeed "less referenda could be necessary." It appears that in order to save the euro, some are prepared to sacrifice not just national sovereignty but even democracy.
