Spanish bailout - the straw that broke the camel's back?

Despite the intense debate which surrounded the Fiscal Treaty, and ultimately its passing by the Irish people two weeks ago, its overall impact on the Euro crisis discourse has proven to be minimal.  The speculation had immediately turned to the details of a Spanish bailout, a prospect that would have been ridiculed only three years ago.  No matter what pans out in the Euro zone, the only certainty is that nothing has proven to be outside the realms of possibility. 

While there was bound to be apprehension within Brussels and Frankfurt at the prospect of a lack of a democratic mandate for the controversial terms, the conservative nature of the Irish electorate was predictable.  Despite the fact that the main political parties are deemed to be untrustworthy by vast swathes of the population due to the undelivered promises of the last election, the fact that the vast majority of the political and academic establishment was behind the Treaty – however grudgingly – was a major reason behind the overwhelming yes vote.  The requirement of years of austerity was seen as a lesser evil than the unpredictable consequences of Ireland leaving the Eurozone, an outcome that probably would have been brought about by a negative vote.  Another decisive factor was the reassurance provided by the facility of the ESM if, as expected, we need a second bailout.  Of course, the viability of the ESM is still questionable, given its inadequate size and the threat of contagion sparked by the Spanish banking crisis.

In relation to Spain, the necessity of even a partial bailout has not exactly been a secret.  The scale of the property crash over there has been comparable to Ireland, and the requirement for extra capital on the scale of Ireland’s was always going to be an eventuality.  While the leaders of Spain and the EU are trying to keep a clear divide between the Spanish banking problem and the sovereign, no matter what happens the cost will have to be borne by Spanish taxpayers, or through the ESFS.  

The likelihood of a successful Spanish bailout is unlikely, but one for Spain and Italy is impossibility.  There is simply not enough cash reserves, or economic growth, within the EU to be able to put up E600-700 billion euro for bailouts for two of the largest economies in the EU.  The stringent terms of the Fiscal Compact are a not-so-obvious predecessor to Eurobonds and a European Department of Finance, two outcomes that may be announced in the conference being held in two weeks.  Once again, Merkel and Burroso will claim the outcomes of the conference as being a resolution of the crisis.  There will be a lull of perhaps a few months; things might begin to look up.  But then, as before, further crises will envelop the euro – be they economic or political - requiring more drastic action. It was always thus.