Fear of crash contagion

Though the risk premiums have subsided to more moderate levels, the economic and financial stability of the euro zone is still subject to the intense pressure of the Irish crisis. Only political reasons can explain why Ireland has yet to apply to the European Rescue Fund, but intervention is practically inevitable. If this is so, it should be done urgently. And the most urgent point of all is to undertake a recapitalization of the Irish banks, which Dublin cannot handle.

For this reason the European Commission's proposal is to proceed to a rapid bailout of the Irish financial system, thus to recover, at a high but measured cost, part of the confidence of the markets. But the disorder is not limited to Ireland; it has infected Portugal, is hurting Greece (where Eurostat has discovered a deficit greater than foreseen), and threatens to contaminate Spain - if the Spanish authorities do not handle this new crisis episode with due competence.

To act with competence means, firstly, to accept that a likelihood of contagion exists. On Monday the Portuguese authorities admitted that Portugal may be obliged to resort to the Rescue Fund, for the pressure of the markets does not react to mere statements of intentions. The economy ministers of the euro zone now face a complex situation, because in the interests of the common currency they must recommend to Ireland that it speed up its application for aid, at least for the banks; and because the Portuguese economy is slipping into a similar situation.

Today, just as when the fateful process began that ended with the intervention of Greece, it is not enough to say that "Spain is not Ireland."

True, Spain is not Ireland - among other reasons, because the risk premium for Spain stands at around 200 basis points, while that of Ireland is over 600. But with each episode of the crisis, the differential of stabilized debt after the maelstrom is higher than it was before. The Spanish risk premium has not yet returned to the 100-basis-point level after the upsurge of the first crisis, nor even to the 150-point level after the second. This situation reflects the latent distrust of investors, and heightens the cost of company financing.

The situation of Spain is a delicate one, though still far from the edge of the abyss. Its financial solvency depends on the budgetary cutback plans, on reforms in the medium term (especially concerning the financial system, which must take concrete shape immediately) and on expectations of economic growth, this being an imperative condition for reducing unemployment and the deficit.

Recovery is difficult when the financing of the economy grows steadily more expensive due to the distrust of investors. Hence political management has to be very careful.

Particularly to be avoided is any gesture implying that the expenditure cutbacks will not be respected; any indication that the financial reform will not be concluded in time; and any suggestion that the pending reforms of the labor market and the pension system will be put off until some later season. But unfortunately, this last blunder has already been committed.