The intertwined problems of sovereign debt, European banking systems, and the euro itself will continue to be
debated despite the measures that came out of June’s meetings in Europe. Yet it is the economic and financial
situation in Spain that is driving policy now. The precedents being set because of Spain are in a sense more important
than discussions about the euro, for decisions about the euro can be delayed, whereas the pain in Spain is acute and
the time for decisions is now.
What are Spain’s key problems? First, there is too much debt, not just for the sovereign but also for banks, for
numerous private companies, and for many homeowners. Second, the sovereign debt continues to rise due to budget
deficits, in part because of measures needed to fix Spain’s banks and corporates, just when the world’s private sectors
seem less interested in providing new funding. Third, and most importantly, measures to improve debt and deficits
have brought on an economic contraction that some fear will turn into a free fall.
Adjustment in Spain will continue to be severe. Yet I would reiterate the sentiments of last year’s paper on sovereign
debt, classifying Spain as a country whose sovereign debt problem is daunting, but not quite insuperable.1 The bank
problems also appear solvable, though the outcome will not be pleasant; an earlier paper had already identified the
Spanish banking system as among the neediest in Europe.2
So, what would it take for Spain to succeed, to keep daunting from becoming insuperable? The following sections
will show that there has been some progress on the big problems that Spain faces, and that the sums under discussion
are in the right ball park to get the situation under control – enough that the daunting may stay superable. The process
will take years to prove itself, and in the interim Spain will endure more drama. In Churchillian terms, Spain is at best
at the end of the beginning of solving its economic problems.
