Economic Outlook: At Merkel's insistence

By ANTHONY HALL, United Press International  |  Oct. 19, 2012 at 11:45 AM
share with facebook
share with twitter

Spain may actually win a standoff with the European Union, where leaders now say international aid soon could go directly to Spanish banks.

Lawmakers are attempting to put laws on the books that will allow Financial Stability Mechanism funds to go directly to banks in Spain, which would sidestep using the government in Madrid as the middleman.

Handing a loan to the Spanish government -- where it would be passed on to the country's struggling banks -- would add to the sovereign debt load, but cutting Madrid out of the loop would mean Spanish banks would get help directly from the international community. The benefit is that Spain would not have to shape its budget according to the terms of an international loan, the likes of which have doomed the economy in Greece.

The term to use is tail spinning. Greece continues to cut spending and raise taxes to keep the ratio of government debt to productivity in line with demands from the lending parties -- the so-called troika, made up of the European Central Bank, the European Union and the International Monetary Fund.

So, Athens cuts spending by freezing wages, cutting benefits and laying off workers, only to find the country is less productive than it used to be.

But keeping the precious debt to productivity ratio in line means Athens can accept billions of dollars in international loans, which adds to its debt, which prompts another round of austerity measures, which appears to be keeping the economy in decline.

After a series of hard core budget adjustments, Athens is currently looking to trim its debt load by $13 billion more. The stakes are high economically -- socially, as well. Police speculated a stroke or a heart attack killed a demonstrator Thursday -- the fifth to die in during protests since April 2010.

Who thought this up?

Actually, this can be placed at the feet of German Chancellor Angela Merkel, who has every legitimate reason to try to safeguard her constituents' tax dollars, which are being used to bail out Greece, where many German's feel -- with justification -- the government was overly generous and irresponsible.

Spanish Prime Minister Mariano Rajoy has been holding out on asking for assistance, which has kept investors on edge for months.

Rajoy's argues aid should go directly to Spanish banks. This makes sense on paper to everybody except, once again, the average German taxpayer and Merkel, who are extremely wary of helping private banks in another country. Imagine U.S. taxpayer funds going directly to private banks in another country. How would that play in Kansas City or Detroit?

Can you say uproar?

The compromise in Europe is for the 17 members of the eurozone to agree to a central bank regulator for the region, most obviously the European Central Bank.

That's the missing piece of the puzzle. Should a central authority have jurisdiction over banks in Spain, then Germany would be assured it has not handed its money off to a private business in another country over which it has no oversight.

Germany has been berated for being too cautious, slowing down the international rescue efforts at every step. At Merkel's insistence, however, commonsense might prevail.

In international markets the Nikkei 225 index in Japan rose 0.22 percent while the Shanghai composite index in China slipped 0.16 percent. The Hang Seng index in Hong Kong added 0.15 percent while the Sensex in India dropped 0.58 percent.

The S&P/ASX 200 in Australia gained 0.26 percent.

In midday trading in Europe, the FTSE 100 index in Britain lost 0.1 percent while the DAX 30 in Germany fell 0.51 percent. The CAC 40 in France dropped 0.45 percent while the Stoxx Europe 600 shed 0.46 percent.

Related UPI Stories
Trending Stories