Mission Impossible In Spain

Wolfgang Munchau, writing in the Financial Times, gives his analysis of the problems in Spain. He argues that the major problem lies in the dominant belief system held by leaders in the core economies. They believe that austerity and the attainment of debt to GDP goals will persuade investors to purchase Spanish sovereign bonds and lower the cost of debt service in Spain. He does not agree with the core leaders. Investors have responded to announcements about austerity goals by selling their Spanish debt. A growing economy is more able to repay its debt than a shrinking economy. He then speculates about how eurozone leaders will deal with the likely problems that are likely to ensue in Spain. His focus is on the need for recapitalizing the Spanish banks and in reducing the size of the financial system in Spain. Neither of these will be popular in Spain or in the core countries.