Stratfor's George Friedman on the Eurozone Bailout of Spanish Banks: All about Germany and Politics

One analyst we always enjoy reading is George Friedman of Stratfor Global Intelligence. Stratfor typically looks at issues of global security and the intersection with politics, demographics, and economics. Today they published a very interesting piece entitled “Spain, Debt and Sovereignty”. Their spin is more political than our typical SFM posts. We have noted some highlights below, but urge everyone to read it in full.

“…Because the bailout dealt with Spain’s financial sector directly rather than involving the country’s sovereign debt, Madrid did not face the kind of demands for more onerous austerity measures in exchange for the loan that have led to political instability in countries such as Greece…”

“…As an export-dependent country, Germany needs the eurozone to be able to buy German products. Moreover, Berlin cannot allow internal political pressures to destabilize the European Union as a whole…”

Germany is taking the lead in providing support to Spain’s banks without having any control over them. “…If this becomes the norm in Europe, then Germany has moved from the untenable threat of expelling countries to the untenable promise of underwriting them. Europe, in other words, has accommodated itself to the perpetual crises without solving them…”

A report in Der Spiegel says that European Central Bank President Mario Draghi, Eurogroup President Jean-Claude Juncker, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso are drafting a stabilization plan that requires Eurozone governments to balance their budgets. “…Borrowing would be permitted only if approved by a Europe-wide finance minister, a position that would have to be created and supported by a select group of eurozone finance ministers. If approved, money could be borrowed by issuing eurobonds…”

“…There are two problems inherent in this approach. The first…is the assumption that Europe’s core problem is irresponsible borrowing and that if borrowing were controlled, the European problem would be solved. Irresponsible borrowing is certainly part of the problem, but the deeper issue is trade…”

“…The ability to manage a national budget, including the right to borrow, is a central element of national sovereignty. If the right to borrow is transferred from national governments to unelected functionaries appointed by a multinational entity, a profound transformation of democracy in Europe will take place… It reflects a fundamental principle of European political philosophy: the belief that disinterested officials are likely to render better decisions than interested politicians…”

“…The problem, of course, is that the decisions made by this board will be highly political… But the core problem is the decision about who will and will not be allowed to borrow… Given that the board will be composed of the finance ministers of some eurozone countries — and that they will have to go home after a decision — the question of who will be denied permission will be perceived as highly political and, in some cases, as extremely unfair…”

“…The ultimate issue has nothing to do with economics, save for the trade issue. It is a question of the extent to which European publics are prepared to cede significant elements of national sovereignty in exchange for secured lines of credit, subject to the authority of people they never elected…In practice, however, it could create an explosive situation…

“…In any event, by taking power from the electorate, it risks a crisis of legitimacy…The system has evolved to a point where, to some Europeans, this crisis of legitimacy may be preferable to the current cycle of endless crises…”

A link to the article is here.

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