The big news today is the €100 billion bailout that the European Central Bank sent the way of tottering Spanish banks. Matt Yglesias says this is a big step forward:
The key point is that though Spain will still have to abide by its existing austerity-oriented fiscal commitments, there are no new strings attached in terms of supervision of Spanish fiscal policy by Brussels, Frankfurt, or Berlin. That’s contrary to the precedent set in the earlier bailouts of Ireland, Greece, and Portugal and contrary to commitments made previously by Angela Merkel and the leaders of some of the smaller European countries when they created the bailout funds that are being used…
On the other hand, Paul Krugman is a bit more skeptical:
So there’s nothing necessarily wrong with this latest bailout (although a lot depends on the details). What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless.
He notes also that the market for Spanish bonds is still moving the wrong direction. Similarly, Duncan Black points out that this bailout will be added to Spain’s national debt (about 10% of GDP), and that for $100 billion you could give hire half of Spain’s unemployed for a year at 34,000 euros. Wolfgang Münchau agrees, saying “The eurozone must recognise that some form of debt relief, or default, will be inevitable.”
Whenever something like this happens, I’m always reminded of this terrifying Steve Randy Waldman post. I can’t quite believe it in full but the world is doing its best to convince me otherwise:
…the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.
If that is indeed their preference in the Eurozone, it might be the end of them. Brad Plumer observes today that the bailout calmed the markets…for precisely four hours and 40 minutes.