Thursday 31 May 2012

'Spain will leave the Euro first'

6 reasons Spain will leave the euro first
Spain is too big to rescue, and doesn’t want it anyway

Matthew Lynn

30 May, 2012

The euro debt crisis, like any really spectacular geoeconomic event, is spawning its own special vocabulary.

We’ve already had Merkozy, now relegated to the footnotes, and are slowly getting used to the clunkier Merlande or Merkellande, as the oddly matched pairing of the German Chancellor Angela Merkel and the French President Francois Hollande has been dubbed. The Grexit, short for Greece finally giving up on the single currency, has been trending for the last few weeks. And coming up next: the Spexit.

What’s that? It’s shorthand for Spain quitting the euro — and we’re going to hear a lot of it over what promises to be a turbulent summer.

The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries. They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into. There are few good reasons for the country to stay in the euro — and little sign it has the will to endure the sacrifices the currency will demand of them.
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Spain's scary $19 billion bailout of Bankia is the climax of a manic housing boom that hit the country before 2007. Michael Casey reports on Markets Hub. Photo: Bloomberg.

Even with the fresh Greek elections looming, Spain has moved center stage in the euro crisis and is likely to remain in the spotlight for the rest of the summer. Its economy stumbles from bad to worse. The bond markets have turned on it decisively, pushing rates on 10-year bonds to 6.45%, close to the levels hit at the depths of the crisis.

The banking system is teetering on the edge of a full-scale run. Bankia has already had to be bailed out by the government, and there are fears that others might be in just as bad shape. In the entire recorded history of capitalism there has never been a property crash that hasn’t been followed by a banking crisis. Spain has a huge property crash, and it’s not likely to be the first exception to that rule.

Its economy is already back in recession, and is likely to shrink further. Unemployment is up to 24%. One in four Spanish households now have no breadwinner. Retail sales are now falling at 10% year-on-year. Yet the prescription from Brussels and Berlin is precisely the same as it has been for every other country struggling with the euro. Endure a deep recession. Let unemployment rise. Allow wages to fall until you claw back competitiveness.

In Greece, people have just about put up with it — until now. So have the Irish, the Portuguese, and the Italians. The Spanish won’t. Here’s why.

One: Spain is too big too rescue. When it comes to the crunch, the EU will always bail out the Greeks. Its economy is only worth 230 billion euros. It can be subsidized forever. If the Greeks vote for a government that rejects the bailout package, some more money can be thrown at them. Pumping 10% of gross domestic product into the economy only costs 23 billion euros — peanuts. That is not true of Spain. If the economy collapses, it can’t be rescued. It will have to do the hard work by itself.

Spanish workers have been protesting austerity for a long time.

Two: Spain has tired of austerity already. Remember, the protests against cuts began in Madrid a year ago with the “indignados” movement, which started sit-ins across major cities in 2011. The protests spread from there to Greece, and other euro-zone countries. The austerity had hardly even begun, yet already it has provoked strong opposition. The country faces many tough years in the euro zone, and there is little sign it is prepared for that.

Three: Spain has a real economy. The Greeks understandably feel nervous about life outside the euro zone. They don’t really make anything. Spain is a successful economy with a perfectly respectable industrial base – its export to GDP ratio is 26%, similar to the U.K., France or Italy. Only last week the Japanese car-maker Nissan announced a major new investment there. Spain’s problem was a deranged currency that created an insane property bubble, which burst with calamitous results. But there is no reason for Spain to fear it doesn’t have a prosperous future outside the euro. It has plenty of successful export industries.

Four: Spain is politically secure. For many countries, euro membership is more about politics than economics. The Greeks stay in because it locks them into Europe (rather than being part of the Turkish sphere of influence). Latvia wanted in because it made it part of the EU rather than being dominated by Russia. For the Irish, it is about separating themselves from Britain. The Germans stick with the euro because the EU still represents a break with its troubled past, even if that is fading for the younger generation. For the French, the currency boosts their influence in a world where medium-sized Europeans states don’t count for much anymore. But Spain does not have any of those issues. It can take or leave the euro and the EU depending on whether it works or not. And right now it clearly isn’t working.

Five: Spain has bigger horizons. The Spanish economy looks partly to Europe. But it looks just as much to the booming Spanish-speaking economies of Latin America (and indeed the huge Hispanic market in the U.S.). Rather like the U.K., Spanish business has always looked to the global rather than the European market. Why tie yourself to a failing project when there are much bigger opportunities out there?

Six: The debate has already started. There is already a serious discussion underway in Spain about the future of the currency. Plenty of mainstream economists and pundits are arguing that the real problem is the euro, and Spain will only recover once it gets the peseta back. The taboo has been broken. That isn’t true in Greece, where even the far-left Syriza party still clings to the idea that it should stay in the euro.

For all those reasons, the Spain is the nation within the single currency that might conclude first that a negotiated departure from the single currency is a logical step. It might not be alphabetically correct, but the Spexit will come before the Grexit.

Matthew Lynn is chief executive of Strategy Economics, a London-based consultancy. His latest book "The Long Depression: The Slump of 2008 to 2031" is published by Endeavour Press.

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