As Europe’s South Spirals, North Fiddles and Chaos Looms

Bloomberg
Editorial
October 1, 2012

Anyone who thought the euro crisis was coming under control might want to think again.

Only three weeks after the European Central Bank calmed markets with its open-ended promise to support sovereign bonds and hold down borrowing rates throughout the euro area, harsh reality is reasserting itself: Greece, Spain and other struggling governments are being compelled to stick to austerity measures that are thwarting their economies, while Germany and other core euro countries remain unwilling to do what’s needed to prevent the euro area from breaking up.

Spain has taken the spotlight as Prime Minister Mariano Rajoy pushes through the country’s fifth austerity budget in nine months amid a new wave of protests in Madrid and secessionist rumblings in Catalonia. It’s an impressive feat of fiscal responsibility: Rajoy is trying to make sure ahead of time that Spain’s finances will satisfy the European Stability Mechanism, the European Union’s bailout fund, with which his government must have an understanding before it can access the promised ECB support.

Rajoy’s government, in office less than a year, is walking a political tightrope. It needs to convince furious Spaniards that it’s acting at its own initiative and isn’t merely capitulating to the EU’s demands. Problem is, its belt- tightening efforts could prove self-defeating. They will weigh further on an economy that forecasters already expect to shrink by 1.3 percent next year, narrowing the tax base and increasing demands on government spending.

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