Betting on a bluff

Pure coincidence, or reflection of the world we live in: Spain's most recent electoral turnabouts, that of 2004 and that of the other day, have gone hand in hand with events (the Atocha bombing, the aggravation of the euro crisis) that dramatically show the impossibility of separating national issues from international ones. Today, as in 2004, the challenges to our security (physical or economic) loom both inside and outside our borders.

To restore Spain's international credibility and her position in the front rank of Europe, we need to get back on the path of growth, creation of quality employment, besides improvement of our productivity. In short, we have to mend our past ways. But the truth is that the sacrifices deriving from budget cutbacks and structural reforms may prove useless, if they are not accompanied by far-reaching decisions in the EU. Spain is now completing the serial changes of government in the four southern European countries that have so far suffered the worst financial difficulties. In particular, Spain, though having undertaken important reforms, now finds that these were insufficient, or ignored by the markets.

These states have by now shown just about all their cards: cutbacks, austerity, technical governments, whatever; there isn't much more left in the repertory. The markets' cold reception of technocratic governments in Greece and Italy, combined with the rising risk premium for Spain, show that real solutions lie much more without than within our frontiers. The impression is that the markets have discounted reforms in the national ambit. That is, they take it for granted that these will happen, and will be harsh; but they seem to have arrived beforehand at the conclusion that the European leaders have not yet reached: that the crisis will remain alive as long as the markets are in doubt as to whether Germany and the European Central Bank (ECB) are prepared to act as moneylenders of last instance. This is what is becoming clearer day by day.

The German chancellor, Angela Merkel, has said on several occasions, lastly at her CDU party's convention in Leipzig, that "if the euro fails, the European Union fails," adding that "Europe is going through its most difficult hours since World War II." It seems as if the markets have run at the red cape, and are prepared to make a lot of money betting against that promise.

Many operators suspect that Merkel is bluffing. And they have their reasons, because even as Merkel spoke so dramatically of the future of Europe and World War II, she said she was not prepared to modify the two elements that undermine the credibility of that promise: first, by publicly insisting, for the nth time, that the treaty of Lisbon forbids the purchase of sovereign debt by the ECB; and second, by repeating that the issuing of euro-bonds is in no way the solution. The two refusals are intimately related because if, as has been proposed, the European Financial Stability Fund (EFSF) were granted a banking license, it could issue euro-bonds backed by the ECB, which would then indeed be capable of limitless lending to the Fund; which would deactivate existing and potential speculation in the markets.

So far, Germany has refused to take this step, arguing that it was not legally possible; but, above all, because it feared that if it used the ECB to inject liquidity into the states, the consequent alleviation would induce these countries to reject new sacrifices, and even to drop the reforms now under way. However, now that the will for reform in southern Europe is becoming satisfactorily apparent, it is increasingly up to Germany to commit itself. The moment of truth came recently in Athens and Rome, when it was seen that Papandreou and Berlusconi were bluffing. Now it is the turn of Berlin. Merkel is going to have to show her cards, and soon.