Everyone knows Spain is in trouble. Its unemployment rate has jumped to 24%, while 10-year bond yields are at their highest level in over a decade. And perhaps worst of all, the government seems to have exhausted the most obvious policy tools—Spain has already hiked taxes, slashed spending and cut social benefits.
So what can Spain do? Here are 3 options for how Spain could turn things around, courtesy of the Financial Times:
Option 1: Full international bailout. Greece, Ireland and Portugal have already been bailed out, but Spain is twice as big as all those three combined. Ireland and Portugal both took international bailouts when their yields topped 7%. Spain is very close to that point right now
Benefits:
- Spain is on the brink of default right now, and an injection of capital could be a significant lifeline for banks.
Disadvantages:
- Wow, where do I start….it would cost over $500 billion, would stretch EU resources to the limit, and would leave little left over in case France or Italy need help.
- An IMF bailout would come with strings attached (read: austerity)
- Moral hazard is always a concern.
Option 2: Bailout “lite”. This scenario would involve using bailout money to recapitalize Spanish banks and could even lead the ECB to buy more Spanish bonds.
Benefits:
- Spain could use the money to revive its banking system, and this “lite” version would be more manageable than a full-scale bailout (fewer strings attached).
Disadvantages:
- The ECB already tried buying Spanish bonds just a few months ago, and it wasn’t much more than a band-aid for Spain’s problems. Doing so again wouldn’t mollify investors for very long.
- They may be less severe than in option 1, but even small austerity measures required in return for aid could really sink an economy with such high unemployment.
Option 3: Sit tight and do nothing. Spain has already implemented bank reform, labor reform, and fiscal reform—some say patience is the best option.
Benefits:
- I don’t really see any here…I guess the bright spot is that exports are growing and Spain’s current account deficit is shrinking.
Disadvantages:
- Spain’s economy is expected to shrink 2% this year. Unemployment is approaching 6 million people. Business conditions are terrible. It’s unlikely that things will just work themselves out without some form of action.
- Greece illustrates just how detrimental austerity without growth can be.
As the 4th largest economy in the Eurozone, Spain’s problems are a big deal. I’m not saying these are the only options Spain will ever have to consider, but right now they’re certainly being discussed. Which of these options offers the best solution for Spain? I’m sure I’ll hear something about how these aren’t the only choices on the table, so is there a better course of action to save Spain?
Rebuild the Spanish Armada, put people back to work, and start conquering Latin American Again. Pray they find El Dorado and all it's gold.
In all seriousness though, option 3 certainly doesn't look very attractive mainly because the whole we need to grow and introduce austerity is pretty much an oxymoron. I think that what needs to happen is either the entire EU start pulling itself even closer together and unify with economic conditions for those who can't keep their shit straight. Otherwise, start pulling it apart. This ridiculousness like Steve Liesman's 3 to 4 trillion dollar global bailout package is simply insane. Just insane. As a note, I think that at the point I quite frankly don't care what is 'good' for Spain at this point.I mean if I were Spain I would love for the Euro to come in and start backing me with minor sanctions simply to save it. The problem is that history has proven that Europe doesn't always do the smartest and most rational things when faced with a crisis. Normally they screw it all up.
Not the worst idea I've heard. +1
clever
I really don't see any good options. Scary times.
There is another option... spend on education, health, infrastructure, etc... to boost their economy and if it doesn't work default and exit the Euro. At least that way they will have something to show for their efforts. Austerity (with or without bailouts) just means the pain without the gain.
I don't think Spain can get out of this mess all by its own. This is a global crisis and we need to re-vitalize the whole world. How did we get out from the 1931 crisis and stagflation of 1970s' ?
I actually agree with Krugman on his prescription for the US/Eurozone. We need a LOT of spending, and like Relinquis said, on the right things (education, infrastructure, etc.) Right now there is no one to do the spending, and austerity on top of the depressed spending levels is just a recipe for disaster (and decreased revenues which pretty much defeats the purpose of austerity in the first place.
No one is fighting any major wars, there is very little massive spending projects being undertaken (no more space race, etc.) and everywhere around the globe is slowing down. This is the point in time where I think Keynes would be right.
I think there's no way out of this. There needs to be a massive amount of debt restructuring, and creditors who have lent to them have to be penalized for their lack of due diligence. We've seen that none of the measures taken so far have led to any meaningful improvements other than merely deferring the pains to a later date.
I think Spain, unlike Greece, has solid and thriving industries that have the potential to revitalize their economy. They need to drop out of the Eurozone, and return to their own currencies. I think this is the best option. This will be extermely painful for the Spaniard in the short run, but only this option can provide the natural corrective mechanisms to adjust their structural problems deeply ingrained in their system.
This never would have happened under the rule of Maximus Decimus Meridius.
I agree 100% about the need for some, if not all, of these countries to drop out of the Eurozone. How can you solve a macroeconomic problem like this when a county cannot devalue its currency to match the collapse in its assets. Like sanjose04 pointed out, that's the 'natural corrective mechanism' that being in the EMU does not afford.
Full fiscal union seems like a pipe dream as the Frenchys and the PIIGS are not going to be fans of their fiscal and public policies being dictated to them from Frankfurt and Berlin.
As far as Krugman goes, whenever I hear him talk I hear very little about spending on 'good' things like infrastructure and more on stupid things like increasing public sector employment. Great idea!!! Lets get some more public sector union members!!! In case Krugman has not bothered to check, those are the people who bankrupted Greece.
An economic entity formed on a geo-political basis seemed doomed to fail from the start.
The Brits had the fortunate experience of being on the wrong side of Soros and getting knocked out of the ERM in the early 90s... At the end of the decade they declined to join the Euro recognising that the member countries would eventually have to give up some control over their fiscal policy to a central European authority for the Euro to be along term success. This is something that our econ professor debated with us at length at the time. If I remember correctly most economists had highlighted this, although the rhetoric in the media was not necessarily congruent with this point of view.
The politicians and banks will want to see a more fiscally integrated and politically centralised EU & Euro Zone. It will be interesting to see if they will get their way. I'm not confident that the markets will give them the time / chance or that the citizens of Europe will want to go along this time.
I just hope Euro Zone members don't end up having a lost decade (or longer) because of this. It's so unnecessary.
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