The eurozone faces fresh worries over Spain’s ability to borrow off the commercial markets as the yield on its bonds came perilously close to the levels that forced Portugal and Ireland to seek bailouts.
On Tuesday, Spain’s yield rate was 5.93% – just shy of the 6% mark which makes borrowing turn into a loss.
But it seems that no matter how hard Europe tries to dig countries out of recession and near bankruptcy, it is always endemic problems which scuttle any hopes of recovery.
In Greece’s case, it was corruption. In Portugal’s case, it was chronic and long-term lack of economic growth. In Ireland’s case, it was overspending in the development sector. And now, in Spain’s case, it is long-term unemployment at a staggering rate of 23%, with up to 60% youth unemployment in other areas.
In addition, Spain’s successive and turbulent governments have not managed to slash its deficit from 8.5% to the required 3% as set out under the Maastricht Growth and Stability Pact and the new fiscal deal (yet to be named) which leaders agreed on earlier this year.
The EU, and the eurozone, has bolstered its firewall somewhat, but when one considers that Greece only made up 2% of the EU’s Gross Domestic Product, and Spain accounts for 11%, then one can immediately see that the fallout and repercussions are going to be much, much greater.
Spain overspent by €90 billion last year and figures for this year do not look much better. The jitters now also risk spreading to Italy (that famous buzzword ‘contagion’) as its own bond yields stand at the 5.5% mark, although that is down from the perilously high 5.7% they reached on Tuesday.
The economies of Italy and Spain are the third and fourth largest in the 17-country eurozone after Germany and France and there is mounting concern that the €800 billion firewall planned by the currency union’s governments will not be strong enough to contain the fallout if Rome or Madrid asked for help.
But true to its new solid position, Germany has reacted with sympathy. Finance Ministry spokesman Johannes Blankenheim said Spain “has carried out wide-ranging reforms in many policy areas and we regret it that the markets so far are not appropriately rewarding these enormous reform efforts”. The rise in bond yields in Spain and Italy are also being seen as signs that the market-calming effects of the massive credit infusion by the ECB are wearing off.
No matter how calm European leaders are trying to remain, the fact of the matter remains that it is the credit ratings agencies which call the shots. Europe’s problems are endemic – they are all related to overspending, lack of growth, joblessness, corruption and failure to implement restructuring measures. Europe has tried everything – threats, loans, chaperoning, investment and more, yet still, every time a raft of corrective measures is introduced, they have a limited effect for a while, and it then goes back to normal.
Malta, of course, remains to be in a decent position. Jobs are being created and visitors continue to arrive, but budget cuts had to be made – some of them painful. The cost of water and electricity is still, whatever anyone says and how they attempt to defend the tariffs, astronomical. But then again, this is what is preventing us from sliding into the same mire as our Mediterranean neighbours. Is it worth the pain? We’ll revisit that question in about five years’ time.