The eurogroup is making use of its institutions to help Spain with its ailing banks, and that's sending a good signal to the markets, says Michael Hüther, the Director of the Cologne Institute for Economic Research (IW).
DW: Spain will ask the European Union for help with its banks. How important is this step in resolving the current debt crisis in Europe?
Michael Hüther: I think it's a very important step. All key players - Spain, its European partners and above all the capital markets - said before that the Spanish government can't carry this additional burden of this very particular problem the Spanish banks are causing. It's not like the Spanish governments have been idle over the past few months. To the contrary: They're working on balancing their budget, they're opening up their labor market and they're reforming their public finances - also for the region. Spain also has a debt rate that's 10 percentage points lower than Germany's. It's only appropriate to find a special solution for the very particular problem of Spanish banks.
With all the reforms underway, why did Spain still draw the ire of the financial markets?
What the excessive spreads for Spanish government bonds express is, in my opinion, not a solvency risk of the Spanish state, but a risk of whether or not the eurozone will continue to exist as it is. Investors are quite obviously not willing to buy Spanish bonds, because they aren't sure whether they'll even get their money back in euros. This is a fear that concerns Spain in particular.
But will the markets assess the situation differently now that Spain is getting aid from its European partners?
The alternative would have meant that Spain would have had to carry the burden alone. We're not talking about some small institutions here. We're talking about system-relevant banks for the eurozone. What we're seeing in terms of solution and action is a European political solution. It's important for Europe to make use of its existing institutions, rather than constantly looking out for new things, such as a banking union or joint deposit protection schemes. Europe is proving that it capable of action.
How likely is it that Spain will recover?
I'm not a pessimist when it comes to Spain. Unlike Greece, the country has a functioning administration, the state can act, reforms are underway, it's a completely different situation to start with. Yes, Spain does have a very particular problem when it comes to the real estate market. But that has nothing to do with what happened during the global financial and economic crisis. The necessary write-downs are happening now. But overall the structure is in place, and I think we can expect a stabilization of the situation by the end of the year.
For a long time, Spain played down the crisis of its banks. How much is the government to blame for what happened?
It's very difficult to do the right thing when it comes to banks. Do you recognize the problems openly at an early stage and try and intervene, or would that only make things worse? I wouldn't want to judge the Spanish governments for their behavior. Of course, they could have reacted a bit more swiftly, but on the other hand you have to acknowledge their will to try and solve the problem alone. And you have to keep in mind that some of its EU partners, Germany in particular, made demands in return for bank aid: they said Spain had to introduce further austerity measures. And that was simply absurd.
Spain is the fourth country to ask for help from its European partners. Aren't the capacities going to dry out soon?
We are slowly reaching the limit of what's possible. But in contrast to what is happening in Portugal, Ireland and Greece, in Spain it's not about public debt - it's about stabilizing the banking sector. That requires a lot more targeted action, which we'd even be able to give to more countries, if necessary. And so, no, our capacities haven't dried out yet.
The German weekly magazine Der Spiegel this weekend reports about plans in Brussels to establish a fiscal union, which would imply that governments would only be able to use those financial resources that are covered by state revenues. If governments want to spend more, the idea is that they have to report their needs to the eurogroup's finance ministers who would then assess these demands and give out joint eurobonds to finance the debt. Is this a model that would find the consent of the Germans who reject the idea of communalizing debts?
Since it's something that doesn't refer to the past and that would not mean that every state can only finance itself with eurobonds, it is definitely something worth discussing. But the question remains whether it would be compatible with the German constitution. It would mean that states give up a fundamental share of their autonomy, and it would mean that parliaments would give up some degree of their budgetary sovereignty. But we are still sovereign states! This idea would be a qualitative milestone and would possibly send credible signals to the capital markets. But at this stage it seems too big a step to imagine.
Interview: Andreas Noll / nh
Editor: Sean Sinico