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Europe

Spain and Ireland become Europe's star debtors

Spain and Ireland are leaving Europe's bailout program. Economists are not convinced that this represents a turning point, but it could be proof that the EU's bailout mechanism actually works.

The pressure on the European Union's bailout funds will be eased once Ireland and Spain stand on their own financial feet again. This is a good sign, the financial experts say. Jörg Krämer, chief economist at Germany's second largest bank, Commerzbank, describes this as an important step for the bailout program, whose main purpose was to avoid the bankruptcy of individual euro states through common aid.

"That Ireland and Spain will be able to finance themselves through investors is a positive signal," Krämer told DW. But he warned against exaggerated optimism. "I doubt that we are seeing a turning point here," he said. The crisis in Europe is not over yet - as the example of Italy makes clear. The biggest crisis-hit economy in the EU is still struggling to reform.

Worries about Italy and France

Instead, the cost of state salaries in Italy continues to rise, and the economy is not recovering, and there has been no start to a reform process at all. "I wouldn't talk about a turning point in the sovereign debt crisis without a solution to the problems there," said Krämer.

Spanish Prime Minister Mariano Rajoy (R), delivers his speech during the evening session of the Debate over State of Nation at the Lower House of the Spanish Parliament in Madrid, Spain, 20 February 2013. EFE/JuanJo Martin

In his State of the Nationa address, the prime minister noted that Spain had received 40 billion euros to save its floundering banks

Christian Schulz, economist at Berenberg Bank, shares these reservations, but he reckons that the biggest crisis country in the eurozone is not Italy, but France. "There we have the problem of a creeping decline in competitiveness," he said.

Spain, on the other hand, is improving on that score. "Spain has really reformed hard for the past two years," said Schulz.

The EU's decision in 2011 to effectively allow Greece to go bankrupt sparked the financial crisis on the Iberian Peninsula, he stressed. But long before that, the bursting of the property bubble really damaged Spain. "If you put it that way, Spain has been in crisis for six years," he said.

Spain profits from bond purchases

That the country is now leaving the bailout program is due to two factors, the economist says. The first was the effort made by the Spanish government to raise taxes, cut expenditures and pass a labor market reform in 2012. "This was fairly drastic and ensured that the automobile industry could stabilize itself and defend its second place in Europe," explained Schulz. One of Spain's biggest carmakers is Seat, a subsidiary of Volkswagen. That led to a rise in Spanish exports, while imports sank, keeping more money in the country. Since salaries are now also lower in Spain than before, companies have more of an incentive to locate production there, Schulz explained.

Illustration - Eine irische Euromünze liegt auf einem Tisch, aufgenommen am 28.09.2011 in Dresden. Foto: Arno Burgi dpa/lsn

Ireland has regained the trust of the financial markets

On top of that, Spain has also benefited from measures undertaken by the European Central Bank (ECB), which has been making unlimited bond purchases of crisis-hit euro countries since mid-2012. That means that Spain has had to pay less interest on loans. Financing costs have dropped from over seven percent in 2012 to a more manageable four percent at the moment. "Spain is in a much more comfortable situation now," said Schulz.

Madrid applied for EU bailout funding to help its ailing banking sector over a year ago, and eventually received 40 billion euros ($54 billion). Finance Minister Luis de Guindos said the country's credit institutes needed no further capital injections for now.

Youth unemployment still a problem

Ireland recovered particularly quickly, having received a classic loan program, and used the time that it bought well, said Krämer. "More than anything, Ireland has won back the trust of creditors and will be in a position to get money from the financial markets without the help of EU states." He doesn't think Spain has made it this far, because it still has one big problem: youth unemployment.

Schulz agrees. "But it's also clear that not everything is going to shine in Europe, after we've lived through two historical crises right after each other," he says. But things are going in the right direction, and the examples of Spain and Ireland show, he argues, that the bailout packages work. "That is a signal for the future," he said. Should any countries need support in the future, then these two countries will provide proof of the efficacy of the program. "That should make it easier to get the necessary parliamentary agreements," he said.

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