Mariano Rajoy is the latest victim of the European debt crisis. Like other European leaders now resting in forced retirement, the Spanish Prime Minister overly nurtured delusions about the nature of national sovereignty within the European Monetary Union. Having recently stared into the abyss, he is now learning quickly to adapt to a very brutal reality. He is desperately trying to avoid the political fate of Italy’s flamboyant former Prime Minister Silvio Berlusconi or the often erratic former French President Nicolas Sarkozy. The lessons he needs to learn are simple. First, nobody will make it alone. Second, a sense of misguided national pride will make things worse. Last but not least, while anti-German anger is reaching dangerous levels, it should not cloud politicians’ judgement.
Let’s start with the last point. Rajoy and others, including Italy’s Prime Minister Mario Monti, believe that Germany is not rewarding their countries for the painful reforms they are undertaking. Rajoy and Monti both believe that the crisis is the result of European shortcomings (i.e. Germany’s refusal to more decisively pour water on the fire), as well as their countries’ homegrown problems. In their view, it is one thing to praise the efforts of euro zone member countries (as Germany has done) and another to actually provide the financial solidarity capable of pushing interest rates on sovereign bonds down to more sustainable levels. The stern German refusal to agree to the timely introduction of some kind of Eurobonds, and the timid firewall recently erected to protect the European periphery from the Greek wildfire, are a case in point. In fact, interest rates for both Spain and Italy are still very much in a danger zone. The main difference between Rajoy and Monti is that the Spaniard is much more vocal about his frustrations. Monti has chosen to be more circumspect.
The first signs that Rajoy had not yet fully comprehended how to navigate the crisis became apparent very early on − the day he signed the fiscal compact on March 2nd. Just hours after the signing ceremony he went before the Spanish press to announce that his country was going to miss its deficit targets. “I am not going to tell the other presidents or heads of state about the deficit figure that will be included in our budget,” declared Rajoy. He went on to add: “I don’t have to. It is a sovereign decision.” The phrase stuck. Since then, markets have eyed Rajoy as a rebel, who is set on a collision course with Germany. When, in recent weeks, his government’s hapless attempts at refinancing the failing financial institution Bankia became apparent, the government in Madrid stubbornly resisted outside help. Markets pushed Spain close to a fully fledged capitulation. As a result, the European central bank, tired of stepping in every time European politicians fail to act, openly accused the Spanish government of making things worse. On Wednesday of this week the ECB took a wait-and-see approach. No lowering of interest rates, no new LTRO’s for struggling banks. The president of the ECB Mario Draghi wants to see politicians act first, before stepping in one more time with massive injections of liquidity.