First Spain won Euro 2008. Then Spain won the World Cup in 2010. Now Spain gets to stick it to its European counterparts again with a no-condition EUR 100 billion bailout. In the June 9, 2012 "Eurogroup statement on Spain," this is what was said regarding expectations for the country as a whole:
"The Eurogroup notes that Spain has already implemented significant fiscal and labour market reforms and measures to strengthen the capital base of the Spanish banks. The Eurogroup is confident that Spain will honour its commitments under the excessive deficit procedure and with regard to structural reforms, with a view to correcting macroeconomic imbalances in the framework of the European semester. Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance."
There's nothing new here. Spain (EWP) must honor current commitments, and its progress will be "closely and regularly reviewed." In the world of sovereign nations, that's a free pass. Now, to be fair, regarding the conditionality set under the bailout, the Eurogroup did note that the "policy conditionality of the financial assistance should be focused on specific reforms targeting the financial sector, including restructuring plans in line with EU state-aid rules and horizontal structural reforms of the domestic financial sector." Nevertheless, Spain escapes with terms that will surely irritate other European nations not so fortunate in their bailout terms.
Enter Ireland who, within hours of the Spanish bailout announcement, said it wants to renegotiate the terms of its 2010 bailout to put it on more equal footing with the Spanish rescue. While it would be surprising to see Ireland get what it wants in terms of renegotiated bailout conditions, perhaps the Irish can take a little bit of revenge on Spain by stealing points from them in their upcoming Euro 2012 match on Thursday. If there's one way to strike at the heart of Europeans, it's to beat their national team in football (known in the U.S. as soccer). Also, given the upcoming Greek election and its implications for Greece's future, the Eurogroup statement certainly won't help convince Greeks to vote for the parties that will implement the austerity measures imposed by the rest of Europe.
Certainly some European leaders might view the current crisis as an opportunity to further consolidate various European countries on fiscal, political, and broader economic levels. However, when you have people of such varying cultures with strong senses of national pride, this may be easier said than done. Perhaps a more simple experiment of just how far apart the citizens of Europe are in terms of wanting further integration would be to toss around the idea of a European-wide soccer league. This league would permanently take the best teams from around Europe out of their respective country leagues and have them compete just against each other year in and year out. This league would supplant the current Champions League format, which allows the top teams to continue playing in their respective country leagues.
How do you think Germans (EWG) would react to Bayern Munich and Borussia Dortmund permanently being pulled out of the Bundesliga in the name of more European integration? Perhaps Schalke fans would be happy, but in general, I don't think this would go over very well. How about La Liga giving up Real Madrid and Barcelona, Serie A saying goodbye to AC Milan and Juventus, or the Premier League waving farewell to Manchester United, Chelsea, Arsenal, and Liverpool? I highly doubt the citizens of Europe would be willing to give up that which is so dear to them in the name of European integration, namely losing the best teams in their respective domestic soccer leagues, thereby weakening the leagues as a whole. Should the day ever arrive when Europeans would be willing to make that sacrifice, then maybe we can start talking about Germans finding it acceptable to pay for the retirements of Greeks. But until then, all we have in Europe are several examples of leaders going against the will of their people and causing anger continent-wide.
As long as the people have the right to vote their leaders in and out of power, if you anger the electorate enough, it will eventually vote into power those who will reject that which was thrust upon it. It may take many years and several elections for that to happen, but that will be the direction the continent heads. Furthermore, the entire process of getting to that point will be fraught with uncertainty and likely bring about large bouts of volatility in financial markets. This includes indices such as the S&P 500 (SPY), Dow 30 (DIA), and the Nasdaq (QQQ), which are full of companies that have large international exposures. In a globalized world, when a financially important part of the world sneezes, the rest of the world catches a cold. I recognize there are still those who cling to the ways of old, a world of decoupling. If the last bear market didn't convince you otherwise, perhaps the next one will.
The bottom line is that Europe is a mess. Its leaders are not only kicking the can down the road, but they are rolling a snowball down a hill. As the snowball full of heavy, wet snow moves further down the hill, it gets larger and larger. It must be stopped before eventually crushing everything in its path. Ireland, Portugal, and Greece were the beginning of the show. Now it's on to Spain, where leaders worldwide will surely claim victory with the latest bailout until, at some point in the future, Spanish bondholders revolt in a big way. And who could blame them? Bondholders saw what happened in Greece, and they can certainly see the sorry state of the Spanish economy.
Eventually, German politicians might feel enough pressure from the crisis and agree to the issuance of Eurobonds. But even Eurobonds aren't necessarily a cure. After all, the problem stems from the countries in question spending too much relative to their revenues and needing to issue too much debt. The countries in question simply don't have the economic growth necessary to support the deficits they wish to run. Bond markets are reacting to the fiscal issues at hand by refusing to lend at rates the countries can afford. While Eurobonds may allow some countries to live far beyond their means for even longer, perhaps for a very long time, Eurobonds will not heal economies that are structurally broken. All they will do is shift the burden of future liabilities, which cannot be paid by the periphery, to the core of Europe, the anchor of the continent.
The Spanish bailout is not the beginning of the end of the European crisis. With no new conditions put on the broader Spanish economy, the crisis now enters a stage in which everyone will demand similar "free passes," and the citizenry will work to vote those politicians into power who will reject any fiscal demands put on their countries in excess of those put on Spain. This will create a whole new set of known unknowns and, even more scary, a set of unknown unknowns that financial markets will have to grapple with at time goes on.