MADRID – What brought me to Spain during the most threatening week of the country’s recent history was an invitation to speak about one of Europe’s darkest hours a half-century ago, pegged to the Spanish-language publication of my book Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth.
One of Spain’s most senior government officials was quick to make the connection between 1961, when Germany’s postwar division was deepened by the Berlin Wall, and the historic moment today, when a reunified Germany, acting from its most powerful European perch since the Third Reich, will determine whether the continent will be newly divided – this time along North-South lines, with Spain outside the euro. But more sharply, this official – who won’t speak for attribution as he must deal daily with German counterparts – believes Germany’s actions (and, more frequently inactions) have put the euro and the European Union project itself at risk.
It is in that context, he said, that Spain has put forward an urgent plan for a European banking union, complete with a pan-European deposit guarantee fund and banking supervisor. The idea has now been endorsed by the European Commission, European Central Bank President Mario Draghi, Italy, Ireland and others. German Chancellor Angela Merkel has not followed suit. Spanish officials are lobbying hard for this idea because they believe it’s urgently needed, but also because they hope to force Germany’s hand in a manner that would move markets and reverse Spain’s downward spiral. So that his purpose couldn’t be missed, Spanish Prime Minister Mariano Rajoy over the weekend surprisingly called for centralized control of national budgets in the euro zone – teeing up a crucial auction of Spanish treasury bonds this Thursday.
Yet Rajoy’s top economic advisers say that whatever they may do themselves, it is beyond them to remain in the euro if markets aren’t more convinced of Germany’s commitment. Although Rajoy’s government has reduced pension burdens, introduced labor market reforms, recapitalized banks, cut deficits and written debt limits into the constitution, markets continue to bet against Spain. Ten-year sovereign bond yields, at more than 6.5 percent, are 550 basis points higher than those in Germany and perilously close to the 7 percent levels at which Portugal, Ireland and Greece required bailouts.
In many respects, Spain has already been forced out of the single market. Most Spanish issuers and companies can no longer access funds from outside Spain, which had long been one of the biggest benefits of the euro zone. The euro’s exchange rate remains strong only because investors are fleeing to Germany as a safe haven, wagering that appreciation could be 40 percent if the Germans leaves the euro.