Local view for "http://purl.org/linkedpolitics/eu/plenary/2007-04-25-Speech-3-429"
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"en.20070425.40.3-429"2
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".
Mr President, the rapporteur accepts that government finances in several euro zone countries are still not in good shape. Sovereign debts in Italy and Greece have not fallen significantly, and although deficits have been falling, this is a result of some higher economic growth helped by global recovery. It is not evidence that the Stability Pact is working.
However, this week’s news from Spain has shown that weak government finances are not the only threat to the functioning of the euro. Spain has an awful trade deficit of 9.5% of GDP, and its construction asset price boom, which has driven domestic demand, is now definitely over. The boom was driven by euro interest rates which had been far too low but are now too high. Spain can now look forward to serious economic difficulties, with rising unemployment and deteriorating government finances. The normal solution to this dilemma would be for Spain to lower its interest rates and devalue, but neither of these options is available as it shares the single currency.
There are therefore three possible outcomes. The first: to forestall a crisis, the European Central Bank reduces the euro interest rate. Germany would not like this, as it would lead to rising inflation; it would also mean the European Central Bank losing its hard-won reputation for holding down inflation expectations.
The second possible outcome is that Spain leaves the euro zone and re-establishes its own currency, enabling it to devalue and have suitably low interest rates. Yes, we have come to the point when this may no longer be unthinkable. It would lead to serious problems of private and public sector debt default that would spill over across the whole euro zone.
Other countries would not want this, which makes the third possible outcome maybe the most likely, and that is large-scale bailout by other countries, despite Maastricht rules against this, and this would be accompanied by centralisation of control over Spanish public finances.
I do not know which of these outcomes will take place, but it is time we faced up to the circumstances: Spain is a large country and the European Union would not find it easy to stand idle while it suffers in recession."@en1
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