- The Washington Times - Thursday, May 31, 2012


Spain appears to be the next victim of Europe’s spending crisis. Like their colleagues in Athens, Madrid’s bureaucrats have been piling on the debt, avoiding any tough structural reforms that might require cutting back. Unlike Greece, however, Spain’s economy is so large that it can’t realistically be bailed out.

Credit-rating agencies are taking note. On Tuesday, Egan-Jones gave Spain a “junk” rating of B, down from BB-. Bank of Spain governor Miguel Angel Fernandez Ordonez ran for the exit a month before his term expired. Expect more early departures as the situation worsens and borrowing costs soar. Interest rates on 10-year government bonds have hit 6.65 percent, crippling the nation’s ability to pay back long-term debt.

On its present course, Spain won’t be growing its way out of this fiscal chasm. The country has the highest unemployment rate in the European Union at 24.4 percent. The public deficit currently stands at 9 percent of gross domestic product. The debt-to-GDP ratio is expected to rocket to 100 percent by 2020. Retail sales dropped 9.8 percent in April, a strong indication of falling consumer confidence. The economy contracted 0.4 percent in the first quarter of 2012.

The depth of the crisis can be seen in the situation of Spain’s fourth-largest bank, Bankia, which recently revealed it needs a capital infusion of $23.8 billion to achieve solvency. That amount would be in addition to the $5.6 billion in state funds it previously received in a partial nationalization deal. Madrid’s original plan was to rescue Bankia by borrowing the money from the European Central Bank (ECB), but that scheme seems to be dead for now after the ECB determined the backdoor bailout violated its rules. The dire state of Bankia undermines the already fragile faith in Spain’s banking sector, which has been struggling in the aftermath of a housing-bubble collapse.

These issues cannot be blamed on austerity measures because the one thing Spain has not tried so far is cutting spending. Almost all the reforms and attempts at closing the deficit have taken the form of raising taxes. Tax hikes may, on paper, close the deficit, but they have a very negative impact on incentives to invest and work. Spain hasn’t bothered trying to reduce the size of government. Even now, the recommendation is to bring forward planned increases in the value-added tax because government spending is going to be higher than expected.

Whether or not the eurozone survives the crisis on the continent could depend on whether Spain undertakes real structural reform. Spain can’t repay its debt unless it grows and is able to borrow at reasonable rates - the rates at which countries like Germany and America can borrow on global markets. Doing so requires putting an end to unsustainable welfare-state and entitlement benefits. It means freeing the labor market from stifling union rules. Unless dramatic changes take effect, there’s a good chance a Spanish collapse could bring down the rest of Europe.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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