Markets initially greeted the Spanish bailout with optimism. Shares rose in America and Japan, and, albeit more modestly, in England too. After all, such a sum was largely unanticipated, with the majority of commentators siding with the IMF and agreeing that ‘just’ €50bn was necessary to prop up Spain’s “vulnerable” banks.
Unsurprisingly, the optimism surrounding the Spanish bailout has been shortlived, and the Eurozone crisis continues. The jitters endemic within the financial system took just 24 hours to resurface, with Spanish and Italian bond yields both creeping back towards 6-month highs. There is still no end in sight for this particular crisis corner, surely the most severe remnant from the financial crisis that first emerged in the US subprime mortgage sector nearly five years ago.
Not only does such prolonged financial instability surely provide a telling example of the ever-increasing interconnectivity of modern financial markets, but it also falls perfectly into the neofunctionalist school of political thought that maintains that European integration has lurched from one crisis point to another, inevitably leading to ‘ever closer union’ at each successive disaster. Once more, this seems likely, with commentators suggesting that the European Union may host a banking union as soon as 2013.
Amid the chaos, it can be hard to form coherent models with which to understand what is going on. Indeed, the very unprecedented nature of the European Union, and its awkward subsidiary the Eurozone, which houses the single currency, does little to help us. This lack of a ‘go-to solution’ has plagued Europe since the start of this crisis, with leaders having to improvise bailouts on the fly, and innovative solutions such as Euro-bonds coming and going by the week.
Some things remain clear. Unless signs of economic growth begin to emerge from various austerity packages around the European Union (beware of further Greek elections coming this weekend where the electorate will “decide which politician gets to implement what the markets dictate.”), the Euro will struggle to survive in its current form. The Spanish bailout will do little to tackle the fundamental structural flaws of the single currency.
Without growth, it is only a matter of time before the markets come to the realisation that such sovereign debt levels cannot be maintained without default. Such a scenario would ruin the legitimacy of the EU’s banking system. The precarious tightrope being walked between austerity and growth, all in an attempt to bring safety to the bond markets, only reinforces the view that Eurozone leaders are at the whim of the markets.
Nothing about the Spanish bailout suggests that the crisis is nearly over, and German antagonism is growing.