Can Spain hang on? Spain is now closest to the precipice. A Spanish bailout would dramatically increase the chances of the euro breaking up

Spain is now closest to the precipice. A Spanish bailout would dramatically increase the chances of the euro breaking up. The probability of a disorderly disintegration of the world’s second-largest currency would rise from low to near even if Spain goes.

The capacity of the Spanish state to fund itself is a central question not only for Europe, but for the world. It is difficult to see how a global depression could be avoided in the wake of the utterly unprecedented levels of default that would accompany euro break-up.


Holders and purchasers of sovereign debt appear to think so. Since the middle of last year, yields on Spanish government bonds have tracked those of the strong core economies. Before that they had moved in unison with the yields of the three weakest countries.

The reason for the decoupling can be attributed, in part, to the actions of the Spanish government in bringing the budget deficit down (to below 10 per cent of GDP in 2010) and to the country’s comparatively low public debt levels. By the end of last year, government debt, at 60 per cent of GDP, was lower than the euro area average. It compared with 142 per cent in Greece, 96 in Ireland and 83 in Portugal. But the bond market has not priced sovereign debt well in the euro era. If sentiment were to change, Spain could suffer the fate of the peripheral three. Much will depend on how the economy performs and what happens to property prices and banks.

Of the weak peripheral economies, Spain is the most similar to Ireland, both in the nature of its woes and in the existence of real economic strengths (Greece and Portugal have few strengths, while Italy’s traditionally strong medium-tech industries are proving highly vulnerable to competition from low-wage economies).

From the mid-1990s, Spain enjoyed strong economic growth, both because of real advances and because of an unsustainable housing boom, which has ended in tears.

The positives first. Spain’s greatest success has been its strong corporate sector. As a closed economy until the 1960s, its businesses were inward looking and uncompetitive. After opening up, things changed only very gradually. Since the 1990s, though, the pace has accelerated as Spain’s conquistadores have taken on the world and, in many cases, won.

Telefónica is now a leading global player. It owns 02 here and elsewhere in Europe and, having acquired many of Latin America’s telcos, its logo is to be seen emblazoned on call boxes across the continent. Repsol’s petrol pumps are almost as ubiquitous in the Spanish- speaking world, and beyond. Iberdrola is a world leader in renewable energies, running wind farms from Brazil to Scotland to China. In fashion retailing, Zara and Mango have overtaken the likes of Italy’s Benetton. In their global reach, they rival US giants such as Gap. The country’s banks have diversified successfully, with Santander becoming the largest bank by market capitalisation in the euro area.

From an economy-wide perspective, the conquistador phenomenon is to be seen in the foreign direct investment (FDI) figures. From almost a standing start in the 1990s, when the stock of Spanish outward FDI was piffling, it has grown rapidly. By 2009, it was larger relative to the size of the Spanish economy than German outward FDI is relative to that economy.

Spain, however, has a number of underlying weaknesses, many of which were ignored when times were good. Despite many fast- growing and globalising companies, Spain’s competitiveness was eroded during the boom years. One reason for this was its dysfunctional labour market, which went unreformed for too long. Both the centre-right administration from 1996-2004 and the centre-left one in office since did not take on vested interests. The result was that, even after more than a decade of boom, during which Spain attracted proportionately almost as many immigrants as did Ireland, the unemployment rate never fell below 8 per cent.

Now unemployment stands at more the 20 per cent – the highest in the developed world. In reaching that point, the numbers at work in the Spanish economy have declined by nearly one tenth, the worst performance in the OECD after Ireland.

Just as in Ireland, the reason for the unusually large employment shock has been the collapse of the building industry. By the height of the boom, average annual housing completions peaked at three times the long- run average (compared to more than four times here).

Despite this huge addition to supply, property prices rose rapidly. As in Ireland, prices were driven upwards by a credit bubble far more than the “strong fundamentals” so beloved of property cheerleaders. Mortgage debt rose to 65 per cent of GDP by 2009, up from 25 per cent a decade earlier (in Ireland the ratio hit 90 per cent).

But because debt, housing output and prices never reached dizzying Irish heights, Spain has not fallen as far.

At its worst, in 2009, investment spending contracted by 15 per cent on the previous year. Here it contracted by 31 per cent. While house prices have fallen by 40 per cent in Ireland, the decline has been less than half that in Spain – and the property developer class has not gone bust en masse.

According to the IMF, the net direct cost of the banking clean up in Spain has amounted to just 2 per cent of GDP – below the average for advanced economies and a fraction of Ireland’s world-leading 28.7 per cent.

But such a small bill looks fishy. Could the authorities and institutions be hiding something? Far stranger things have happened. The forthcoming Europe-wide stress tests might give more certainty.

And even if nothing is awry, with further falls in residential property prices all but certain, a 20 per cent unemployment rate and rising interest rates, the amazingly low percentage of banks’ loan books not performing looks certain to swell. If Spain were to see anything like the repeated upward revisions to its banking costs that Ireland has experienced, holders of its sovereign debt would drop it like a hot brick.

But that is not the only cloud hanging over Spain. Its public finances might also be hiding something nasty. Since the Franco era, centrifugal political forces have been pushing power from Madrid to the regions. Among the powers devolved has been public spending. Spain has become a de facto fiscal federation.

The regions now account for as much public spending as they do in the de jure German federation, but without the same transparency. Rumours are rife of off-balance sheet spending by sub-national levels of government.

The euro crisis was triggered by revelations in Greece that its public finances were much worse than the official figures had claimed. If such a surprise were to emerge in Spain, it could be the beginning of the end for the euro.

Iceland's President Olafur Ragnar Grimsson has said that the UK and the Netherlands will get back the 4bn euros (£3.5bn) they paid when Iceland's banking system collapsed in 2008.

Iceland's President Olafur Ragnar Grimsson has said that the UK and the Netherlands will get back the 4bn euros (£3.5bn) they paid when Iceland's banking system collapsed in 2008.

That is despite the country rejecting the latest repayment plan in a referendum at the weekend.

Mr Grimsson told the BBC assets from the collapsed bank Landsbanki would "in all likelihood" cover what was owed.

The UK has said the matter will go to an international court.

Iceland's three main banks collapsed in October 2008.

Landsbanki ran savings accounts in the UK and the Netherlands under the name Icesave.

When it collapsed, the British and Dutch governments had to reimburse 400,000 citizens - and Iceland had to decide how to repay that money.

Guarantee question

The weekend result marked the second time a referendum has rejected a repayment deal.

Mr Grimsson said that it was not an issue about paying or not paying, but a question of whether there is a state guarantee and how that would be interpreted under the European regulatory framework.

"I think the primary message [from the referendum] is that before ordinary people are asked to pay for failed banks, the assets inside the estate of these banks should be used to pay the subs," Mr Grimsson told Radio 4's Today.

"That is why the people of Iceland emphasised that Britain and the Netherlands are going to get certainly up to $9bn out of the estate of Landsbanki.

"The first payment will be this December, and in all likelihood this will cover what was paid by Britain and the Netherlands two years ago.

"But to ask for a state guarantee and that ordinary people should shoulder the responsibility is highly doubtful and definitely can be disputed within the European legislative framework."

But he added that if the matter did end up in an international court, "of course" Iceland would abide by the court's ruling.

From today (11 April) it is illegal for Muslim women in France to cover their faces with veils in public.

It's the first European country to pass the law but there's been criticism that it's pointless because only a minority of women wear them.

Any woman caught wearing the burka or niqab faces a fine and will be asked to take citizenship lessons. She can also be subject to an investigation.

If police find her husband is forcing her to cover up, he could face a fine of 25,000 euros (£22,000) and a possible jail sentence.

In the 18th district of Paris, is Barbès. There is a strong Muslim community that lives there, made up of people of Algerian, Moroccan and Tunisian descent.

Continue reading the main story
Five years ago hardly anyone wore the niqab. In another five years we will be like England where there are neighbourhoods and ghettos full of women wearing them

Sihem Habchi worked with the government on the ban
France is home to western Europe's largest Muslim population of six million.

Out of that, the number that wear the burka or niqab differs, depending on who you ask.

Hadjou owns an Islamic clothes shop in the district.

"Selling the niqab is bad for business," he said. "Not many women wear it or ask for it.

"I've probably sold about five in a year."

Ahmed who runs a small business near one of the district's mosques says he rarely sees women covered up and that was before this ban.

"I'd say probably 0.01% of Muslim women wear the niqab," he admitted.

The French government thinks that figure is much higher. Ministers put it at around 2,000 women.

Ahmed said he didn't think that was true: "That's not possible, but even if it's true, it's only a minority that wear it. So what?"

Find out the difference between a burka, hijab and niqab

'Ghettos'
For some, Muslim women wearing veils is a problem.

The interior minister Claude Guéant has been accused of Islamophobia after saying the growing population of Muslims in the country "poses problems".

The French government says they encourage segregation and promote the inequality of women.

Sihem Habchi, a Muslim woman who has worked with the government on the ban, agrees.

Many Algerians, Moroccans and Tunisians live in Barbès, Paris
"It's because it's a minority we need to act," she said.

"Five years ago hardly anyone wore the niqab.

"In another five years we will be like England where there are neighbourhoods and ghettos full of women wearing them."

It is in the banlieues where the government believes this problem is growing.

They are France's version of council estates located about 35 minutes away from central Paris.

In 2005 riots were triggered among angry young people after two teenagers died in Clichy Sous, a poor area in an eastern suburb of Paris.

They blamed police for causing it and many feel that persecution is still going on.

third time in a year the European Union is going through the same ritual, bailing out another insolvent country. Portugal now follows Greece and Ireland to the European welfare office to ask for new loans on the condition of ever more drastic spending cuts.

For the third time in a year the European Union is going through the same ritual, bailing out another insolvent country. Portugal now follows Greece and Ireland to the European welfare office to ask for new loans on the condition of ever more drastic spending cuts.

So far the markets have taken Europe’s third successive sovereign financial crisis in stride. But many economists are a good deal more alarmed, most notably because the bailout formula European leaders keep applying to their most indebted member nations shows no signs of working.

Greece, Ireland and now almost certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them avoid defaulting on their debt. But the aid is really just more loans, and the interest rates the countries are paying, if a little lower than what the private market would charge, are still crushingly high. Their pile of debt gets bigger with every passing day.

Moreover, the price of these loans has been a commitment to slash government spending far more drastically than domestic leaders would have the desire or the political power to accomplish on their own. And for countries that depend a good deal on government spending to generate growth, rapid decreases in spending have meant sustained economic stagnation or outright recession, making every dollar of debt that much harder to pay back.

Economists call this “the debt trap.” Escape from the trap generally requires devaluation of the currency, which cannot happen among countries that use the euro as their common currency, or strong economic growth, which none of the three have, or some kind of bankruptcy process, which all three forswear. Add to that the likelihood that all three countries will continue to have unstable governments until they figure a way out, and Europe’s financial crisis has no end in sight.

“What has been missing, in the debate about how countries can restore their finances to some kind of sustainability, is the limit of how much they can cut in a period of austerity,” said Simon Tilford, chief economist for the Center for European Reform in London. “There is a limit of how much any government can cut back spending and survive politically unless there is a light at the end of the tunnel, a route back to economic growth.”

The problems of the weaker countries are not just sovereign debt, but also lack of competitiveness, both in Europe and the larger world. Without the nations’ restoring competitiveness and selling more goods abroad, which can come only through a longer-term process of reducing wages and taxes to spur private sector investment, economists are not optimistic about prospects for new growth soon.

The crisis in Portugal also raises new questions about whether the European Union will come to grips with the other side of its crisis: the banks. Banks in well-off countries like Germany, France and the Netherlands, as well as Britain, hold a lot of Greek, Portuguese and Irish debt. And if these countries cannot pay their debts, they would have to reschedule them, reduce them or default, causing a major banking crisis in the rest of Europe.

That reckoning would require governments to ask their taxpayers to recapitalize the banks, which is exactly what political leaders are afraid to do.

“We have a banking crisis interwoven with a sovereign debt crisis,” Mr. Tilford said. “Europe needs to address both, and it needs to acknowledge that the banking sectors of creditor countries — especially Germany — are not now in a position to handle restructuring and default, and that governments will have to pump money into the banks to recapitalize them.”

The European Union warned Friday that diplomacy on climate change was moving too slowly after UN-led talks in Bangkok eked out an agreement on an agenda for further negotiations this year.

"Our overall sense is things are moving slow, too slow for Europe's taste. And we cannot achieve what we need to achieve before the end of this year with this speed," EU Climate Commissioner Connie Hedegaard said.
"Too often too much time is spent on how to proceed," she told reporters on a visit to Washington. "What we need is to come down to the content side of this and that is urgent."
The four-day session in Bangkok, which was marked by feuds between wealthy and developing countries, eventually achieved its goal of setting an agenda leading up to an annual UN climate conference in South Africa in November.
But the Bangkok talks largely put aside big picture issues on how nations will cut their greenhouse gas emissions blamed for global warming.
Hedegaard said it was critical to move soon on cutting emissions, pointing out that national pledges have not come close to the UN-led goal of containing global warming to no more than 2 degrees Celsius (3.6 Fahrenheit).
"What people sometimes forget is that there is a time factor when we talk about the climate. It actually does matter whether we start acting globally sooner or later," she said.
The European Union has championed international action on climate change, including through its "cap-and-trade" system that restricts carbon emissions but allows businesses to trade in credits.
Before Washington, Hedegaard visited California, which is launching the first cap-and-trade system in the United States. The effort by the largest US state marks a sharp contrast with skepticism over climate change in the US Congress.
Hedegaard said she agreed with Governor Jerry Brown to keep in touch so that the EU and California systems may eventually be linkable.
"California is not just a very huge American state, it's also the seventh or eighth largest economy of the world. So of course it's a rather strong signal if it gets done," Hedegaard said.
A bill supported by President Barack Obama to set up a nationwide cap-and-trade system died last year in the Senate, with the rival Republican Party arguing that it would be too costly.
Hedegaard met in Washington with lawmakers from both parties as well as officials at the Environmental Protection Agency, which Obama has tasked with regulating greenhouse gas emissions.
Hedegaard said she was fully aware of the political realities in Washington but hoped the United States could move forward.
"It is very hard to understand that in this country it would not be possible to make a policy on, for instance, how to address energy efficiency, because the potential is just that big," she said.

Italy on Sunday urged its European partners to share the burden of the thousands of migrants reaching its shores from North Africa during the region's upheavals, but key German officials rejected the request for help.

"Italy has to resolve its refugee problem on its own," German Interior Minister Hans-Peter Friedrich told daily Welt's Monday edition.
Rome's newly stated policy of issuing visas to migrants from North Africa amounts to a violation of the European Union's Schengen rules for visa-free travel across most of the bloc, Friedrich was quoted as saying. He vowed to bring up the issue at an EU interior minister meeting starting in Luxembourg on Monday.
German state interior minister Joachim Herrmann also criticized Italy's new migration policy and threatened to reinstate border controls to keep the migrants at bay — despite Europe's Schengen agreement.
Herrmann of Bavaria state, which borders Austria and is a possible transit route to northern Europe from Italy, was quoted in Welt's Sunday edition as saying that Italy "has to deal with its immigration problem itself and may not dump it on other EU countries."
But Italy's foreign minister insisted that the influx of illegal immigrants from northern Africa, which has brought 20,000 Tunisians to Italy's shores in recent weeks, is indeed a European problem.
"We want to tell Europe that economic contributions are not enough, political action is necessary," Franco Frattini said on Sunday, defending the decision to issue temporary permits in comments he made on Sky Italia.
Meanwhile, illegal immigrants kept arriving at Lampedusa island, with a boat carrying 50 people arriving at midday Sunday. Italian police also have spotted two more boats on their way, carrying a total of about 300 people, he said.
Italian Premier Silvio Berlusconi on Saturday asked Germany, France and the rest of Europe to show solidarity with Italy in accepting migrants or risk calling into question the whole idea of the European Union.
France has promised to honour the temporary residency documents Rome plans to issue to Tunisians, but insisted they must prove they could financially support themselves in France — a condition many of them are unlikely to be able to meet.
Germany officials insist that Italy and Malta must deal with the refugee crisis on their own.
In a small gesture of solidarity, however, Germany's Interior Ministry said Friday that Berlin is offering to take in 100 North African refugees who are currently on Malta.