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| Don't dither |
| Hugo Dixon & Fiona Maharg-Bravo / May 06, 2010, 00:20 IST |
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Contagion: The euro zone faces its Bear Stearns moment. After the US investment bank was rescued in March 2008, there was six months of drift — and then Lehman Brothers popped. Will Spain, Portugal and others drift now that Greece has been bailed out? If they do, the consequences could be horrendous. To avoid being sucked into the maelstrom, weak countries need to take urgent action.
The early signs from Spain, at least, are not that promising. The economy minister told a radio programme on Wednesday that it was sticking to the current austerity plan rather than considering new measures. Jose Luis Rodriguez Zapatero, meanwhile, has railed about how “intolerable” it is that Spain has been buffeted by rumours that it could be next in line for a rescue package. The prime minister pointed out that Spain’s government debt was only 55 per cent of GDP, well below euro zone averages and less than half Greece’s level.
If times were normal, these arguments might be persuasive. But confidence crises can become self-fulfilling. Even if the rumours are complete madness from Zapatero’s perspective, the market's loss of confidence isn't necessarily irrational, because panicking investors can bring about the very thing they fear.
Also, it’s not as if Spain’s economy is in great shape. The unemployment rate is 20 per cent, the savings banks are in trouble, the budget deficit is over 11 per cent of GDP and the private sector is over-indebted — meaning that Spain has to rely on the willingness of foreign investors to finance its needs.
Evasive action is vital in such a situation. It is a bit like being on the edge of a whirlpool. Spain and Portugal can still escape its gravitational pull by swimming fast. But if they get dragged further into the centre, no amount of hard work will stop them going whoosh.
For Spain, the remedy is pretty simple: make concrete plans to cut the deficit: freeze public sector wages immediately; reform the labour market and recapitalise the savings banks. And do it now.
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