EUROPEAN markets follow a well-trodden path. A bailout plan is announced, sending investors into a frenzy of happiness; nothing much happens; data is published showing one or more countries in even greater crisis than before; everybody panics; equity markets plunge and bond yields jump; another bailout pledge is made. And so on.
We are now at the peak of another cycle: Spain’s economy is continuing to shrink and the markets are waiting for Mariano Rajoy, the Prime Minister, to make his official bond-buying request to the Eurozone authorities. Spain’s central government budget deficit reached 4.77 per cent of annual GDP at the end of last month (even though the year is far from over) and the authorities are desperately trying to retain some credibility with the European authorities (and in time, possibly with the IMF).
Spain’s other problem is that it is moving perilously close to a full-scale break-up, which would make it the first country to be affected in such a drastic, devastating way by the recession. There will be elections in Catalonia on 25 November, following elections in the Basque Country and Galicia on 21 October. But the real flashpoint is Catalonia, which accounts for a fifth of Spanish GDP: the local leader has pledged to call a referendum on independence, regardless of whether he is authorised to do so by Madrid. Yet when they are not threatening to quit Spain, the regions are begging for bailouts, further contributing to the central government’s woes: Andalusia is about to ask for €4.9bn. Together with handouts to Catalonia, Comunidad Valenciana and Murcia, four-fifths of Spain’s regional bailout funds will already be used up (even though there are 17 such Comunidades Autónomas).
The situation is catastrophic for the government, and that is even before anybody works out the full scale of bad debts in the system. The more the economy shrinks, the more loans go bad – and these have already reached €169bn in July, 9.86 per cent of total loans, from 9.42 per cent in June. Real numbers could be even greater.
Wherever one looks, the Eurozone is in disarray. Cyprus is in trouble again. Greece is no better. The French are busy trying to commit economic suicide: President Francois Hollande’s admission that drastic austerity is required was correct, even though it means that he has committed a U-turn of proportions that would make even Nick Clegg blush. As so often, however, it is the wrong kind of austerity: economically destructive tax hikes, including a mad 75 per cent top rate and many other absurdities, rather than a plan focused around measures to reduce the size of the state and supply-side reform.
There is an irony here, of course: some of the Eurozone countries that are nearly bankrupt could yet end up with budget deficits as a share of GDP that are lower than Britain’s. It shows just how hubristic the British have become: the only reason the UK is not facing Armageddon is because the Bank of England (one part of the British state) is buying all of the gilts issued by the Debt Management Office (another part of the state) to finance public spending. Coalition ministers should stop gloating – and opposition spokespeople should stop being so deluded. At least the UK is not facing break-up – if anything, the recession (and the felling of Royal Bank of Scotland and the old Halifax-Bank of Scotland (HBOS)) has reduced the chances of Scottish independence. We are lucky we didn’t join the single currency – but the last thing we should be doing is gloating about the Eurozone’s crisis.