A substantial element of Spain’s crisis is overleveraging to a point beyond what can be repaid with present levels of savings. One can increase savings in order to repay financial obligations either by producing more and consuming the same or by producing the same and consuming less: Spain is unable or unwilling to do either (or at least not on the scale needed to avoid default). This is why aggregate liabilities are still rising during the crisis – although not because families and firms have not started their healthy deleveraging process, but due to the insatiable debt appetite of the government. It is also why the ECB’s Outright Monetary Transactions (OMT) programme has been so widely welcomed in Spain, with little or no understanding of what it truly is: the Eleventh Plague of Egypt which will allow the Pharaoh Rajoy to get the population even further into debt.
Of course, in the short-run the OMT will allow the country to temporarily postpone the forceful resolution of its numerous disequilibria. But Spain’s future now looks darker than before. Why, after the ECB has temporarily removed bankruptcy risks, should Mr. Rajoy, and his statist team of economic advisors, enact those adjustments and reforms which were needed months ago to avoid default and which, nonetheless, they so consistently opposed? There is absolutely no point in taking the necessary steps: with or without a Memorandum of Understanding. The Greek ruling class knows something about this.
In fact, the short-termism of this government is so apparent that many observers are afraid of the possibility that, since speculators foresee a bailout that appears to be a given and have started to purchase large quantities of Spanish debt thus driving down its interest rates, Mr. Rajoy may now be considering not asking for the bailout at all or at least delaying it as long as possible (let’s remember that at the end of October there are two regional elections: Galicia and the Basque Country). What can anyone infer from this bipolar behaviour? Clearly that Mr. Rajoy is not in the least bit interested in pressing the accelerator to solve Spain’s fundamental disequilibria. Instead, his focus is on obtaining the credit he needs to survive: he and the large majority of his party are obsessed with staying in power even at the total expense of the citizens.
What, then, is the point of the OMT? Why are many Spaniards so happy about the prospect of greater monetary activism by the ECB? Simply because they don’t want to resolve the debt and housing bubbles which destroyed their economy but which for a time allowed them to live like they were rich. Today, disproportionate public spending, backed by the ECB promise to monetise Spain’s debt, is the last connection with those bubbles, and neither our politicians nor many Spaniards want to cut that link. Even after the disaster, they still love debt… especially when it is finally paid by others. What is incomprehensible, however, is that the politicians representing those who will have to pay for the costly indolence of Spain’s government – i.e. the Germans – are so willing to sacrifice their money.
Juan Ramón Rallo is Director of the Juan de Mariana Institute.