Tales for Tapas: Irrational exuberance

Spanish government borrowing costs continued to moderate this week, the latest consumer price index figures showed a downward trend without being full-on deflationary, and the country posted a trade surplus of around €600 million, prompting a practically giddy reaction from Economy Minister Luis de Guindos.

Mr De Guindos cited the trade figures as evidence of “the economy’s transformation”.

There are three ways to look at this. The first is that the economy minister is a sentimental sort of fellow whose exuberance errs a tad on the side of irrationality.

The second is that there has been a transformation but – ask any of the six million unemployed – not a positive one.

And the third is to accept that Mr De Guindos’s upbeat turn of phrase actually makes sense. For more than a decade the Spanish economy was fuelled by a bubble. Inasmuch as it is fuelled by anything at the moment it is fuelled by competitive goods and services. This is an important shift, albeit one that has been accompanied by a great deal of pain.

German interest

In Madrid on Monday, Prime Minister Mariano Rajoy and his Portuguese counterpart Pedro Passos Coelho issued a call for faster Eurozone banking union. The two leaders – and possibly a majority of Eurozone heads of government – believe that banking union is the key to restoring credit and thus stimulating job creation.

On the same day, however, an opinion piece by German Finance Minister Wolfgang Schaeuble appeared in the Financial Times arguing that while banking union would be all very well, it isn’t possible under current EU treaties.

Mr Schaeuble made noises about the rule of law and warned that “we should not make promises we cannot keep”.

The immediate beneficiaries of banking union would be governments that are threatened with imploding domestic financial sectors – and the government in Berlin is clearly not among that unhappy number. But Germany nonetheless faces a three-fold threat over the long term (so many things this week come in threes).

The first is that Eurozone collapse would be particularly catastrophic for a country that is doing very nicely out of the single currency.

The second is that Germany could become an importer of disaffected European youth rather than – as now – an importer of young European talent (not the same thing at all) if joblessness persists at present rates in the crisis countries.

And the third is that the crisis is making Germany look like a bully – after nearly seventy years of successful diplomacy designed to burnish its credentials as a good neighbour.

Mr Schaeuble’s point about treaty limitations is a valid one, but it represents a legalistic response to a major political challenge – and, because of its own vested interest, it is Germany more than any other Eurozone country that must rise to that challenge.

Creative and practical

Diplomatic damage limitation may partially explain Berlin’s apparent enthusiasm for an initiative to stimulate credit extended to firms in the Eurozone that employ citizens under the age of 25.

The initiative proposed by the Nicolas Berggruen Institute, a “think and action tank”, will be discussed at a meeting of government ministers and business leaders in Paris on 28 May. It envisages the European Investment Bank (EIB) using a fund of around €6 billion to provide incentives to banks to lend to companies hiring young people.

This is important for three reasons (of course).

The first is that it would be a quick and possibly quite effective way of boosting youth employment.

The second is that the €6 billion wouldn’t go in grants to companies, but in incentives to banks to lend to companies – so the EIB pot would actually be multiplied, with ultimate investment perhaps rising as high as €60 billion.

And the third is that – like the remarkable agreements patched together at speed last summer at the height of the crisis – the initiative, if it goes ahead, would show that European leaders are prepared to confront the Eurozone’s problems in creative and practical ways.

The initiative, though, will not solve the structural problem of youth unemployment.

That will only be solved by economic recovery – which will require exactly the sort of transformation about which the exuberant Mr De Guindos spoke so fulsomely this week. The latest Spanish economic figures do not a transformation make, but they could be construed as evidence that something has begun to stir.

To read more by Anna Maria O’Donovan visit My Spanish Interlude.