We’ve been here before. First, there’s a stubborn refusal to accept the extent of the problem, followed by a persistent reminder that actually things really are that bad and that there’s an urgent need to react, or risk going down with all hands on deck.
No, it’s not the Titanic disaster, but the Spanish bank bail-out saga. Or to use a euphemism that would have made George Orwell grab his gun: the decision to ‘help’ the banks by ‘opening a line of credit’ to the tune of 100 billion euros. That, at least, is what president Mariano Rajoy claimed it was when he returned from watching the Italy-Spain football match last weekend (he evidently had better things to do than to take the flak back home).
I suspect some will soon come to call it ‘the end-game’; an ill-fated attempt to rescue the terminally ill Spanish economy – and the euro. After all, the cash being used just to plug the hole in the banking system is even more than the 85 billion euros that were needed for the whole of Ireland, and only slightly less than the 110 billion euros for Greece (the EU’s real head case).
The markets predictably rallied following the announcement – as they did with the previous bail-outs. This was quickly followed by a collective sigh of relief from Brussels and the markets: politicians had once again yanked the iron out of the fire and saved the day.
Unfortunately, there are many of us who have read the script too many times before, and it’s beginning to wear thin. It could have something to do with the fact that, just days earlier, Rajoy had sworn blind that there would never be a bank bail-out. Even afterwards we were being told, not just by politicians, but by deluded Spanish economists and journalists, that Spain was not Greece, and that therefore, the two could not be compared.
In the middle of all the euphoria it is easy to forget that the measures will not solve any of Europe’s, or Spain’s fundamental problems.
The fear is the bail-out won’t work because the 100 billion euros may not be enough to get credit flowing again, especially if it’s only used to ‘plug holes’. As economists have pointed out, no-one yet knows exactly how much money the banks have really lost or will eventually need to survive.
Despite this, the banks won’t come clean on the real value of the hundreds of thousands of properties they own because to do so will be tantamount to admitting that they are really only worth a fraction of their market price.
A large chunk of the toxic debts relate to the money lent out by the banks to people who, once they lost their jobs, were unable to pay their mortgages. In many cases, these people were immigrants in low-paid jobs who were granted not one, but two or even three mortgages. Yet the signs are that the lessons haven’t been learnt: there are, for instance, banks which are still, quite cheerily offering full mortgages to customers along the Costas.
The nagging feeling is that no-one really knows how to sort this mess out (just read any article on economy to realise that it’s mostly a combination of guesswork and being wise after the event).
It doesn’t help when the ‘solutions’ being bandied about by economists are limited to basically two contrasting philosophies. It’s either the Keynesian approach of pumping state money into public works projects, or the austere economics advocated by Freidman’s supporters.
Economists who endorse spending huge amounts of public money on grand schemes to prevent a deeper recession cite the Marshall Plan as an example to follow. But as any historian will tell you, no two events are ever the same. The type of devastation that befell Europe after WWII was tangible. Cities throughout the continent were levelled, there was no infrastructure and hunger was widespread. To use an unkind metaphor; someone had pressed the ‘reset’ button. As a result, European leaders had it relatively easy because they were able to work with a clean sheet of paper and had clearly defined goals.
By contrast, today’s problems are infinitely more complex. If we take Spain as an example, the country does not need any more grand public works schemes – 54 airports, many of which stand idle, and more kilometres of high-speed rail track than any other nation in Europe should be sufficient proof.
Yet, the knee-jerk reaction to overspending has been to shoe-horn an austerity plan that has stifled any prospect of growth, not just in Spain but in the UK and beyond.
Maybe it’s time to ponder on whether traditional capitalism has reached its zenith in Europe.
Capitalism is all about increasing production, lowering labour costs and boosting demand. Europe by and large has done all three, the problem is that costs are still too high compared to China and India, and Europe has only been able to boost demand by getting into huge amounts of private debt.
Secondly, the west has failed to address the fundamental problem caused by the 2008 credit crunch – basic greed. But you can’t really legislate against this, not in the conventional sense.
Perhaps the answer lies in a radical rethink, one that will require a widespread acceptance that ‘ambition’ and ‘material wealth’ do, in the end, have to be kept in check.
Before I am accused of being a hopeless tree-hugger – or worse, a communist – I would like to stress that personal ambition, per se, is not a bad thing, and that wishing to better one’s life is a noble aspiration. I also believe in the essentials of a free-market economy.
But it’s highly doubtful Adam Smith had today’s model in mind when he championed free trade in his book ‘The Wealth of Nations’ more than 200 years ago (anyone willing to argue that globalisation has not benefited mostly multinational companies to the detriment of small and medium businesses?).
Environmental experts (yes, that old chestnut, the environment) warn us that exponential growth is simply unsustainable. A leap of faith is required; an acceptance that we should set more modest goals and living standards on a global scale – thereby ‘resetting’ the economic button, if you will.
Most people may be unwilling to accept such a level of change, but it may get to the stage that they will no longer have a choice. Some say this is already happening.
There’s always the example of the Titanic, of course, to show us what happens when we resist the forces of nature.