And another 100 billion bailout!

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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.

3 Responses to "And another 100 billion bailout!"
  1. This sounds like a novel idea that the root cause of Spain’s ecomomic problem is bank corruption. I don’t think I like it any more than I like the idea that government spending is the cause of Greece’s economic problem. I do like the idea that the international flow of funds has dramatically changed and a lack of a fundamental international foundation to the euro is driving many euro governments to insolvency. I think that is the root problem to be solved not corruption or government fiscal restraint.

  2. netflix,

    yes, a couple of hours after this post, the markets dropped again. Perhaps Core has more of a following than we know!

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