The question that’s on everybody’s mind is should Spain seek for a bailout to tide over the current crisis?
Even Europe seems to be divided on whether Madrid should actually seek ECB intervention. Spain must ask for ECB help now to avoid panic moments later, feels Luis Garicano, a professor of Economics at the London School of Economics.
Since borrowing costs have moderated after Draghi’s OMT announcement two weeks back, the country’s bargaining power is much better and they can negotiate a better deal, Luis added.
When asked if the process will be a smooth one, Luis said the markets still have faith that things are moving in the right direction, and the process should be smooth in the short-run.
There are, however, a lot of political uncertainties and Madrid needs to move fast. The reset of Europe is trying to redefine the “bailout program” for Spain so that the country doesn’t have to go through a lot of trouble, he noted.
Spain may not have to ask for a full blown bailout because several of of its autonomous regions may start leaving the country. The latest meeting between Catalonian president Artur Mas and Spanish Prime Minister Mariano Rajoy amid growing demand for independence is unnerving.
Such misplaced nationalism and separatist fervor will not do any good in the long term, Luis noted. It’ll be foolish to have two separate fiscal authorities in Spain when the key problem in Europe is lack of fiscal integration.
Since Catalonia generates a higher proportion of central taxes, Rajoy can offer them promises of more money. Alternatively, he can offer a separate legal system where Catalonia collects its own taxes and passes on a fraction of them to Madrid, in the manner the rest of Europe works now.
However, it is not a very efficient system because it effectively means the central government can’t back its promises (on reforms), Luis noted.
Madrid received EUR 100 billion earlier for recapitalizing its stricken banks and there have been talks of using part of the money for tiding over the crisis, which seems dodgy, he agreed.
Madrid is desperately trying to avoid a formal bailout so that it doesn’t come under the direct supervision of the Troika (of the EC, the IMF and the ECB) since bailouts have strict austerity conditions attached to it. But it’s unlikely Spain will succeed in avoiding a full-fledged bailout, he concluded. You can watch the video here.
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