Rajoy’s Cautionary Tale
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.
What Draghi is asking for from Rajoy and others is a clear roadmap towards closer political integration, with dates and benchmarks included. In his press conference this past Wednesday, Draghi reminded his audience of the process that was set in motion in the late eighties that led to the Maastricht treaty and eventually to monetary union. According to him, a similar approach is needed now.
In Berlin, Chancellor Angela Merkel is trying now to prepare the ground and has started to speak to Germans about the need for closer integration. She seems to have recognized that the incessant squabbling over the need and size of bailouts is undermining efforts to stabilize the situation in the euro zone, particularly in the absence of a shared sense of direction. On Thursday of this week, Merkel appeared on national breakfast television to sketch out what she thinks is needed: a more powerful European Commission turned into a real government with a president elected by European citizens at its helm; a stronger European Parliament; more representation of the citizenry of the Union. She openly talked of a two-speed Europe. As Ulrike Guerot at the European Council for Foreign Affairs puts it, the European Union that Germany is envisaging would look much more German, but the price is probably worth paying. Meanwhile, President of the European Council Herman van Rompuy is working on the details of such a roadmap to be submitted to European leaders at the next EU summit at the end of June.
Many observers see these developments as parts of a two-track approach. There is the need on one hand to mitigate the effects of a possible Greek exit from the euro and stabilize the Spanish banking system. This is coupled with the recognition on the other hand that markets need to see a roadmap for closer integration as a sign of the euro zone members’ (and particularly the Germans’) unwavering long term commitment to the common currency.
I would add another dimension. Closer integration is a bargaining chip. If euro zone members want continued German financial help, they have to be willing to cede more sovereignty to Brussels. For countries such as France and Spain this is a hard pill to swallow. However, it should be easier to do things in the name of Europe rather than simply because Germany is asking you to do them. The parable of Mariano Rajoy shows what happens when a misguided sense of national pride clouds European politicians’ judgment. On Thursday, the rating agency Fitch lowered its Spanish investment grade rating by three notches to triple-B. The country has not lost access to financial markets yet, but Rajoy’s behavior in the past few months has done very little to help the cause of his country and of Europe.