And another 100 billion bailout!

So, Spain got another 100 billion to sort out its banks. There seem to be very few strings attached to this bailout: the money comes from the recently set-up European stability funds (EFSF and ESM). The central Spanish government gets it and its up to the Spanish to figure out how to restructure the Spanish banks. Unlike some previous bailouts and ECB handouts, the money this time went to the elected representatives of a country in order to help them do their job better. No money directly going into the bonuses of bank managers this time!

Also, no open humiliation of Spain, as was the case with Greece. Spain is too big to boss around like that, and it houses 5 million people from the rest of Europe, so the Northern Europeans who ultimately pay for these funds decided not to repeat the mistake of being seen to dictate anything to the Spanish.

Still, it is once again a bailout that basically rewards bad behaviour and that is more likely to prevent or postpone a real adjustment rather than speed it up. Another mistake hence.

What bad behaviour? Well, despite the asset bubble already bursting in 2008, Spanish banks are still full of corruption. There have been 4 years of……absolutely nothing done about it.

What Australians might not know about Spain is just how delicate its internal politics are and hence the difficulties in reforming anything there, so let’s briefly put this bailout into context.

The basic political economy of Spain is one of quite powerful regions that almost broke away from each other in the early 2000s. As a reaction to the dictatorial Franco regime lead from Madrid till the mid 70s, regional nationalism came back with a vengeance and regional bureaucracies instituted the learning of their own languages (Bask, Catalan, etc.) and strongly pushed a separatist ‘we are not Spanish’ and ‘we dont speak Castellano’ line.

What ‘saved Spain’ was the spectacular economic development of the 90s and 00s. That growth in large part was fueled by regional banks giving loans to their family members in local politics who hired family members in local property development to build museums, roads, cultural centers, and holiday homes for tourists and residents that never came. In other words, pure corruption and local machismo. Yet, at the same time, there was real growth with a massive increase in education and health levels, and a huge population churning within Spain. Millions of central Spaniards came to Barcelona. Millions of farmers left the countryside and became service-workers. Some 5 million people from the EU came to live in Spain.

Hence, though there was a bubble being created, that bubble helped Spain to become Spanish and European, which prevented it from breaking up: Catalonia is still in Spain today because something like 40% of its population was not born there but only arrived recently due to its economic boom. Hard to break up with the rest of Spain if you are actually just like the rest of Spain!

Hence the property bubble had enormous political benefits to Spain as a whole. Besides, there was no way ‘Madrid’ really had the means to stop the bubble accompanying the real development: the local politicians and their networks were protected and encouraged by the politicians heading the regions of Spain.

Which brings us to what the real game in Spain is at the moment: whilst nothing has really changed in Spain and many structural reforms have not been implemented, including hidden agricultural subsidies and really counter-productive employment-protection laws, there is a recognised large groundswell of political activism oriented towards exposing all the corruption.

Spanish civil society is truly starting to realise who their real enemies are: the local politicians, their local banks, and their property developers. Story after story is coming out within Spain of what they have been up to these last 20 years. Regional politicians building airports that never saw any flights. Politicians who claim their wealth is from winning the lottery. Twice. Etc.

So Spain is indeed slowly becoming German. Regional banks, like “Caja de Ahorros del Mediterraneo” that were hotbeds of corruption have collapsed and there are regional parliaments looking into it. Anti-corruption investigators are finally getting the central political and regional backing to do their job, at least now and then.

The question is whether they really can pull it off. The mountain they face is enormous as essentially the whole of the political system has floated on this type of corruption for centuries. Even today, the ‘Peoples Party’ is blocking attempts to look into some of the bigger banks, like Banksia, presumably because of the political networks that would then be uncovered.

The hope must be that Madrid will run a strong anti-corruption drive. The difficulties will be that they have to have the active cooperation of the Spanish regional parliaments: it will need to be a grand coalition and there are many ways in which regional and national politicians can attempt to sabotage such a coalition for there are many readily available excuses. Hence it will also need a mobilised civil society drive to keep tabs on the backbone of the political apparatus in order to quickly stamp on sabotage attempts. It is a tough ask.

Can they do it and will they even try? It is hard to say. Many of the young Spanish who could help are leaving. The influx of foreigners has stopped. So in the short run Spain is stuffed whatever it does. But in the medium run there is some glimmer of hope. Young people who migrate leave family members behind who realise they must change their country to coax their siblings and children back. With the economy doing poorly the next two years, the population’s attention can be kept on the corruption issue.

On the other hand, the clientelist culture that is the heart of this is deeply rooted in Spanish society and permeates most public and private institutions, including most universities, ministries, companies, etc. Most positions in power in Spain have been gotten within this system and reforming it from the inside out is tough for who has the incentive to help and who has the incentives to sabotage any attempt?

Yet, Spain has in the last 20 years also seen the development of more meritocratic companies and institutions. It has a couple of banks, universities, and ministries that are more or less meritocratic. It has a very educated and active civil society. So there is a group of people willing to try to make a societal transformation happen, unlike in Greece for instance. But whether they are strong enough to truly challenge and disrupt the clientelists? Hard to say and it would need a whole generation to do it.

The 100 billion bailout itself is counter-productive to this longer-term game: it takes some of the pressure off and creates the expectation in amongst central politicians in Spain and elsewhere that even without true reforms, others will tide one over for the duration of a political cycle. Just think about it from the point of view of a senior regional politician: you now have two choices. One is to take the politically very dangerous route of challenging local and regional potentates, many of which will be from your own party and who might have some dirt on you too. The other is whine and say to Madrid ‘we want a share of the bailout’, meanwhile going through some pro forma anti-corruption processes that in reality just take out the opposition. The second would certainly tide one over a whole election cycle, allowing one a fairly safe retirement and a cushy job in one of the banks. The former could get you ousted from the party or worse. Only real desperation and determination on the side of others would get you to do the first, and 100 billion bailout just reduces the pressure.

Europe has hence again violated a golden rule: when the underlying problem is political corruption, dont send money! Only send money after the corruption has been tackled internally because sending money to a corrupt system simply means there is a new pot of cash for the corrupt to appropriate and fight over, allowing them to continue their lifestyle and their networks.

As to the wider European problem and the role of this latest bailout, I must admit I heaved a sigh of relief when comparing this latest bailout to the plans on the table just a week ago (which I truly thought would be disastrous). Thank god that we didn’t get the spectacle of European bureaucrats trying to monitor Spanish banks, or to have Eurobonds. The Southern European politicians calling for those things, including the French PM, got nowhere. The Dutch PM for instance called the idea of Eurobonds ‘idiotic’ and common sense prevailed in that there was a wider acknowledgement of the complete inability of Brussels bureaucrats to monitor Spanish banks or tell the Spanish how to reform.

From the point of view of Europe as a whole, it is therefore a case of ‘muddling on as usual’. A pot of money is sent that makes life easier within Spain and prevents a harsher and quicker re-adjustment to problems. It solves nothing and certainly by itself wont help Spain grow. As with Greece, Ireland, and Portugal, the rest of Europe is just hoping that Spain will actually truly reform and tackle its structural problems. So far, it hasn’t happened yet in Greece, Italy, Spain, or Portugal and those countries are still in deep paralysis. The political calculation must have been that ‘something had to be done’ and no-one wanted to make the real hard decisions so another pot of money was thrown at the problem in the hope it goes away and stays away.

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38 Responses to And another 100 billion bailout!

  1. conrad says:

    You forgot to mention that the main government was actually in surplus before the GFC and had started paying down its debt. Surely that counts for a lot.

  2. derrida derider says:

    What bad behaviour?

    Sheesh, Spain ran regular budget surpluses prior to its massive housing crash. They knew that it was a bubble, too, but having foregone monetary policy entirely by joining the Euro there was very little any Spaniard could do about it. Even that little they tried to do, liberalising land development to try and hold prices down. That didn’t work, of course – if anything it made the “corruption” (ie banks doing what they are supposed to do and lend out the funds they’ve been given) worse. Unlike the US case there were few dodgy “innovative” products here aimed at extracting rents (other than rent in the ordinary sense).

    My point is that this narrative about Europe’s current troubles being due to shiftlessness and incompetence on the part of the troubled country’s governments is a distraction from the real issues. Yes, it’s not totally untrue, but the citizens of these countries, shiftless and thrifty, competent and incompetent alike, are being punished out of all proportion to their quite venial sins. And the punishment is so indiscriminate that it is spreading to those who have not sinned at all.

    A system so unstable that quite small policy shocks can send it into violent oscillations is not worth keeping. A macroeconomic god who damns whole continents if their management is not absolutely perfect is not worth worshipping.

  3. JMB says:

    Well written, as usual, DD.

    However, you left us wondering. Where is the solution to the European issues to be found? What is the true macroeconomic god which is worthy of trust, since the current one has failed?

  4. DD,

    didn’t I already said in the post there was not much the central government could do about it and that it is mainly an issue of many local governments being intertwined with property, banks, and politics?
    You clearly are way too positive about Spain. If you conflate Spanish politics with just the central government and presume that if that one had no debt that the whole thing must be ok, then you have missed the whole point of the post. The property boom there was out of all proportions and was regionally-lead. What happened in Spain makes the sub-prime market in the US look tame.

  5. conrad says:

    “What happened in Spain makes the sub-prime market in the US look tame.”

    Is this really true? Perhaps you have the real data, but at least by my eyeball account from a few years back, a lot of the speculation was being done by people living in the cold and miserable Northern European countries looking for holiday houses (like the UK & Germany). This means that whilst the money lost would have been a problem it would have distributed across a number of countries. Another big difference is that the housing stock in Spain was pretty low quality for European standards, so actually building some decent housing is not such a bad idea. Alternatively, in the US, the quality of housing has generally been excellent for many years and so building too much is even less of a good idea.

  6. Paul frijters says:

    Otherwise the wilipedia article on the spanish housing bubble is pretty good. They were running close to a million new houses a year at one point, on a country with less than 20 million households.

  7. murph the surf. says:

    Thanks Paul , well written.
    Trouble is that some might go and try to learn a lesson from this!

  8. JC says:

    So, Spain got another 100 billion to sort out its banks. There seem to be very few strings attached to this bailout: the money comes from the recently set-up European stability funds (EFSF and ESM)

    Honest question. How do you know Paul? Have you seen the conditions attached. I’ve looked but can’t find anything. All I/we know is that the EU granted a bailout with a nice looking number of E100 billion and that’s about it.

    If the money to be used to buy preferred shares or is it going to fund more debt of that segment of the Spanish banking system that is in trouble?

  9. JC says:

    Here’s the problem as far as I see it and why I think it screws things up even more.

    The EFSF or whomever (they’ve made up so many acronyms now that you forget) lends the money to Spain at a preferred level in terms of Spain’s debt structure. In other words if Spain ends up in the toilet with the debt, this stuff still holds up surviving a general default. So immediately the current debt holders lose ranking which obviously screws up the value of the present debt.

    I have no doubt in my mind that the Spanish government won’t recap their banks with preferred equity but do it with debt thereby placing further trauma on Spanish debt- this time in the private market.

    End result? The deal sends Spanish bonds yields higher (which they did) thereby imperiling the Spanish government ability to fund at high rates.

    Everything these people touch turns to crap. They even make conditions after a bailout worse then before.

  10. Katz says:

    These moneys are a loan, not a handout.

    The Spanish government is required to pass these moneys onto zombie banks, who in turn repay debts to Other banks, mostly French and German, to stave of the collapse of these creditor banks.

    Meantime, Spanish taxpayers are on the hook to repay the European stability funds €100b.

    This is an egregious example of moral hazard wherein French and German banks are being shielded from the consequences of their own poor commercial decisions by victimization of Spanish taxpayers.

    • Dan says:

      Nice summation.

    • Pedro says:

      Not every loan gone wrong is evidence of moral hazard. You have to show that the loan was unduly risky and that the banker was less concerned about making the loan because of a govt guarantee (actual or implied). Even then, the spanish banks that borrowed the money are not exactly Ma and Pa Kettle and are just as much, if not more, culpable for any silly borrowing. The spanish taxpayers are on the hook because their govt nationalised the banks and not for any reason attributable to the frog and kraut banks. Still, why bother with reason when you can have silly morality story.

  11. JC says:

    These moneys are a loan, not a handout.


    The Spanish government is required to pass these moneys onto zombie banks, who in turn repay debts to Other banks, mostly French and German, to stave of the collapse of these creditor banks.

    Nope. The money is to be used to recap the failed, government owned banks.It’s the ECB that loans them money to cover any shortfall on the liability side of the balance sheet.

    Meantime, Spanish taxpayers are on the hook to repay the European stability funds €100b.

    Yep and the present bondholders taken down a notch.

    This is an egregious example of moral hazard wherein French and German banks are being shielded from the consequences of their own poor commercial decisions by victimization of Spanish taxpayers.

    No it isn’t. You seem to be confused with what moral hazard means.

  12. Paul Frijters says:


    what pedro said. These regional banks are not owned by Germans or French, and, as Pedro correctly points out, bailing them out is a political decision taken by the Spanish government, not forced upon them by others.
    Just think of what a 6.5% return on 10-year spanish bonds means compared to the 1.3% on German bonds: effectively people who put their money where their mouth is see close to a 30% chance that the money wont be paid back at all. Equivalently, that there is a 50% chance that they will get only 40% back. That’s a huge risk-premium before there was any bailout, quite independent on others.
    Now tell me again how the evil Northern Europeans are being such baddies for bailout out the Spanish. They are being stupid, yes, but baddies? You are embodying the exact mechanism I point to when I say the Northern Europeans have to stop doing this: the ingratitude will push the Eu apart.

  13. Pedro says:

    This is from the NYT today:
    “It is unfair for critics to ask Germany to bear even more risk. Should Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay nothing, while the euro survives, Germany would lose $899 billion. Should the euro fail, Germany would lose over $1.35 trillion, more than 40 percent of its G.D.P. Has the United States ever incurred a similar risk for helping other countries?

    Some critics have argued that Germany, having benefited from the Marshall Plan, now owes it to Europe to undertake a similar rescue. Those critics should look at the numbers.

    Greece has received or been promised $575 billion through assistance efforts, including Target credit, E.C.B. bond purchases and a haircut after a debt moratorium. Compare this with the Marshall Plan, for which Germany is very grateful. It received 0.5 percent of its G.D.P. for four years, or 2 percent in total. Applied to the Greek G.D.P., this would be about $5 billion today.

    In other words, Greece has received a staggering 115 Marshall plans, 29 from Germany alone, and yet the situation has not improved. ”

  14. Paul Frijters says:


    that’s a great link. Hans-Werner Sinn is spot on that all these bailouts are completely counter-productive and undermining the EU. The US is a great example of a place where they are not seriously thinking of bailing California out.

  15. paul walter says:

    Yes, clearly the Sinns of the Father are visited on the next generation. Katz still seems more plausible.

  16. Labor Outsider says:

    It is pretty extraordinary how badly this post gets things wrong.

    First, the Spanish banking sector is dramatically undercapitalized and without a combination of reform and recapitalization growth will continue to be held down. Spain cannot undertake this recapitalization itself without losing market access – hence the need for the bail-out. You can frame this as a morality play all you like but if Spain can’t fund itself and eventually partially defaults on its obligations it will matter for all European countries, including Germany through its cross-border exposures.

    Second, the bail-out will not be unconditional. The precise details are still to be worked out but the conditions are likely to include significant reform of the banking sector, with oversight from the IMF and the European authorities. I don’t know where you have got the impression that this money will be condition free and that there won’t be significant oversight.

    Third, the banks in most trouble may be Spanish but they were not funding themselves from domestic deposits alone. Before the crisis Spain was running a current account deficit close to 10% of GDP. Where do you think that capital flow was coming from? The French and German banks are up to their eyeballs in the Spanish housing disaster because they some of the key funders of the excess investment.

    Fourth, the core European countries have a responsibility to help the periphery for a bunch of reasons. First, the monetary union itself almost guaranteed that large imbalances would arise in a sub-set of countries. Real interest rates were far too low in the periphery and too high in Germany. The bubbles in Ireland and Spain fed on that fact. Second, the European regulatory and supervisory architecture was too nationally focused and not focused enough on systemic risk at the European level and how cross-border capital flows were accentuating those risks. Third, the German and French governments themselves transgressed the Stability and Growth Pact early last decade, which made it much easier for other countries to transgress the rules themselves.

    Each peripheral country made a significant contribution to the problems they face. All must undertake a bunch of structural reforms. However, the problems in the periphery are also reflect dysfunction in European institutions and thus have to be addressed at that level as well.

    One further thing to reflect on. The German national saving rate was not that high before the recession relative to other European countries. It was the national investment rate that was extraordinarily low and domestic growth was also very weak before the crisis. That low investment rate partly reflects a very highly regulated and uncompetitive domestic non-traded goods sector, as well as weak domestic demand growth due to the fact that domestic wages were being held artificially low. So, national savings were channelled to overseas investment opportunities instead. Germany didn’t have a domestic bubble but its internal policies and the choices of its banks helped to fuel bubbles elsewhere. Given how much their banks are on the hook in the periphery, I’d say they have a pretty strong interest in helping the peripheral countries out.

    Finally, the Europeans will eventually end up with a eurobond and significantly more fiscal risk pooling than is currently the case or the eurozone itself will implode. The politics won’t permit it yet, but as the crisis deepens the logic will become inescapable.

  17. Alan says:

    Why is it necessary to show that a bank did not rely on an implied actual government guarantee? Meanwhile the ECB continues on its path of fighting an inflation monster that does not exist…

    Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.

    Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.

    What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Barack Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed “sado-monetarism.”

    There really is a point at which policy makers like Sinn need to address the social cost of their policies instead of rabbiting on about poor suffering Germany.

  18. Paul Frijters says:


    yes, a corpse no longer breathes and a live person breathes, but that doesnt mean that you can revive a corpse by blowing air into the lungs! Similarly, yes, a healthy system has capitalised banks and an unhealthy one has capitalised banks, but capitalising unhealthy ones is not a magic pill, particularly not if the banks are in fact dead.

    The rest of your reply is in a similar vein: talking symptoms, not causes, and failing to see the deep political paralysis that these countries are in. You agree there have to be structural reforms but fail to include in your assessment why there has been none these last 4 years! Why has there been no structural reform in Greece, Italy, and Spain these last few years, LO? Essentially, you refuse to get into the messy business of the politics and mismanagement of the situation and talk symptoms.


    I am actually quite in favour of a helicopter money drop by the ECB, as indicated in previous posts and commentary. I agree it is not helping matters to keep tabs on the money supply, though I do not think it will be a magic cure either. Like bailouts, it is better to do the money printing after the structural reforms are done, rather than help postpone them by doing it now.
    As to Sinn being blind to social cost, I would suggest to you that soft doctors are making stinking wounds. Indeed, I would say a lot of the social problems you now have in Greece and Spain are precisely because outsiders have rewarded the internal political elites for not making the hard decisions. Whilst Germany is reacting to the symptoms, the culprits blame the helper for a lack of a cure.

  19. JB Cairns says:

    I agree with Fyodor.

    Please post more often


    did you actually read what LO wrote.

  20. JC says:


    First, the Spanish banking sector is dramatically undercapitalized and without a combination of reform and recapitalization growth will continue to be held down.

    I think that’s only partially correct. The private banks like Satander etc.,at least from what I’ve read, aren’t as badly off, as they managed to stay away from some of the domestic real estate lending and branched out elsewhere. The crux of the under-capitalization and severe losses are with the government and provincial banks from what I understand.

    Paul F

    Whilst Germany is reacting to the symptoms, the culprits blame the helper for a lack of a cure.

    I’m not certain that’s entirely correct and Germany has screwed up on a number of fronts. Germany was the nation that demanded steep provisions in the Maastricht treaty with particular focus on budget deficits and penalties for going over. Fine. Yet they were the first country to break the rules and ignore the penalties. So much for their own discipline. Secondly, they had a voice- in fact the most powerful voice in the EU- in terms of which countries would be allowed in. Thirdly, they have been absolutely terrorizing the ECB to point where every single action taken by them is second guessed on the weekend edition of Der Spiegel through “unnamed Bundesbank sources”. FFS

    Lastly Paul, I’m not getting the anti- German or anti-northern feeling you seem to be other than say a few protests in Greece, which most people ignore anyway.

    The structure of the ECB, it’s residence, the psychology and in fact the methods chosen to conduct monetary policy were wrong from the beginning. It was always very Germanic and the south (including France) were never like that.

    Germany is not blameless in this clusterfuck. Not by a long shot.

  21. JC says:

    Real interest rates were far too low in the periphery and too high in Germany.

    Honestly, I’ve seen this being brought up time and time again and it seems to have become virtual reality without evidence.

    The ECB has been dogmatic in the way it’s run monetary policy with respect to it’s targets, such as inflation. (I forget if its 0 to 2% or zero to 3%). Every-time it nudged the top of the range interest rates went higher and they began to pursue tighter monetary policy. The ECB was not on a real estate target. They were on an inflation target and were faithful to the range.

    As for the real estate market crashing.. well ours for instance went higher than Spain or Ireland I think, but we never suffered a crash.

    Perhaps Scott Sumner is right, in that it wasn’t the looseness that caused the problem, it was the central bank not recognizing that they were far too tight at critical moments.

  22. Labor Outsider says:


    Structural reform is obviously critical, and I made that clear in my post. But structural reform without getting other policies right at the European level won’t lead to the recovery that you seem to think that it will.

    You seem to think that the mismanagement is all or primarily local and thus you have missed the bigger and I would argue more important picture. In your world Spain’s enormous CAD is an enormous problem mainly reflecting Spanish failings but barely mention the counterparties to that CAD (primarily Germany) and what they were doing. Take a look at the BIS data on the cross-border claims of the German and French banking sectors and tell me with a straight face that the blame for what has happened shouldn’t be shared around. It is certainly ridiculous to cast Germany in the role of helper rather than contributor to the current mess.

    Greece aside, it is a lie to suggest that none of the peripheral governments have undertaken structural reforms since the crisis began. Spain’s new government announced major labor market reforms as recently as February. Portugal’s government has also significantly liberalized its employment protection legislation. Monti’s government in Italy is also making progress. These things don’t and can’t take place overnight. More importantly, structural reforms don’t yield benefits fast enough to compensate for the deleveraging going on in other parts of the economy – while internal devaluation also tends to make things worse in the near-term – hence the need for outside assistance through the transition period.

  23. Alan says:

    There are also some large institutional problems in the EU. Addressing an economic crisis of this scale through a body, the European Council, that is effectively a premiers conference of 27 states does not make for fast roe efficient decisions and the the heads of star and government tend to focus onward on their own electorates rather than outward towards the EU as a whole. Ditto the eurozone which has its own set of multinational institutions with the same institutional weakness. The US had very similar problems under the Articles of Confederation.

  24. Labor Outsider says:

    Actually Alan, the ECB is the only important institution that is for the Eurozone only. Indeed, that highlights one of the problems with governance in that there are key countries within the decision making bodies such as the UK and Sweden that are not members of the currency zone. Your broader point though about the dysfunctionality of the decision making apparatus is entirely correct and is compounded by the democratic deficit that exists the pan-European level. Indeed, I think that is a big problem going forward in that arguably a more integrated Europe is necessary to emerge successfully from the crisis but it will be difficult to get voters in individual countries to agree to the necessary reforms given the lack of accountability that currently exists.

  25. Alan says:

    The Eurozone has its own structures. The ECB is the inevitable central bank governors conference and the Euro Group is the inevitable finance ministers conference. In theory all these multilateral bodies are accountable because the member state ministers who run them answer to national parliaments but that is largely fiction. COAG gone made with over a dozen working languages and very little programmatic specificity.

  26. paul walter says:

    Yep, it all comes out in the wash, doesn’t it?

  27. JC says:


    All that could be a question for academics to discuss. Right now the Spanish 10 year bonds are teetering on 7%, a sort of a magical figure that has seen previous EU countries reach that level never come back from. This is after the bailout over last weekend!

    I think its over unless the ECB does what it ought to do, ignore the field marshals at the Bundesbank and basically buy assets, lots of them and promise to keep doing so until a growth target has been reached. However they don’t have the balls I think.

    Play brinkmanship. If Germany wants the leave the Euro, let them. What are they then going to do when 70% of their exports are to the EU? They’ll end up doing what Switzerland did and that’s peg their currency to the euro or they’re finished. There are still some moves to play in this endgame, if only the ECB had the balls to do so and ignore the weekend commentary from “unnamed Bundesbank sources”. This weekend could be it though with the Greek elections.

    • Dan says:

      Honest question: why would the ECB do that? The only reason I can think of they might is to keep inflation within its target band on the low side.

      • JC says:


        The last thing they need is enuring the inflation rate is at the lower part of the range. However knowing the ECB, that’s exactly what they will do and consider themselves a success.

        • Dan says:

          Gnah, you’ve misinterpreted my question.

          Let’s assume the ECB understands their price-control brief in narrow terms – as they seem to – and that they are competently able to address it – a slightly longer shot.

          Why would they buy assets?

        • JC says:

          Buying/selling securities is a major tool the CB uses to reduce or increase the money supply. At zero bound it’s in fact the major tool. When a CB buys, it increases its balance sheet and therefore increases the monetary base (which is really high octane).

          I really don’t think they are addressing the problem, as the large CB’s are seriously undermining their QEs through absolutely appalling signaling.

          They do QE. As soon as they do, we begin to hear hawkish comments from them about their inflation concerns thereby basically undermining what they’ve done.

          The real secret about our recent times, 2008 onwards is just how ratshit appalling the large CB’s have been in managing monetary policy.

  28. Paul Frijters says:

    LO (and others),

    my basic argument on structural reforms is that without it there is little hope for growth and well-founded fears that more money will corrupt and give the wrong incentives. Compare the Marshall plan with aid to Haiti: the Marshall plan was following a large-scale restructuring of Germany’s institutions so that there was actual hope for the future. And the future indeed was good (though we may argue how much effect the Marshall plan actually had. There were some nasty preconditions to it….). Aid to Haiti following earthquakes and the sort has and will the next time round mainly help shore up the position of a very parasitical elite, effectively making things worse.
    Now, Spain is not Haiti nor is it Germany 1948. It is not even as bad as Greece now, which in my opinion is beyond outside help entirely, but the underlying problems are the dysfunctional networks combining politics, banking, and property developers, and sending outside money to Spain whilst there have been 4 years of doing nothing about these networks is a recipe for further inaction against underlying problems and thus is bad for long-term growth. Soft doctors!

  29. paul walter says:

    Onya, Paul Frijters.

  30. murph the surf. says:

    I have always thought this series of events in Europe post 2008 would to some extent mirror what has happened in Japan over the last 20 years.As an uneducated observer that is.
    Not much reform there even allowing for labour reforms.An elite directs the flow of the economy and has done since the war.

  31. JB Cairns says:


    Spain was growing very nice thank you without any reforms.

    The banking industry is patently unprofitable normally in a recession perhaps even a depression.

    no sensible person is going to argue against reforms needed in Europe however they will not overcome contractionary fiscal policy.

    you need to overcome the liquidity problems of the banks and have sensible econmic policy.

    Angela Merkel seems to have learnt nothing from the great Depression.

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