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'EU can't afford Spain and Italy rescue'

Monday 11 July 2011 - by Jacqui Street

Left: EC president José Manuel Barroso. Right: Spanish prime minister José Luis Rodríguez Zapatero

The European Union cannot afford to rescue Spain and Italy if their debts become unmanageable according to leading economists and policymakers.

Speaking at think tank Open Europe's event in London, Barclays Capital European economist Antonio Garcia Pascual argued that the scope of the EFSF bailout package could be broadened to include flexible credit lines, but admitted it would not be sufficient to save Spain and Italy.

The European Financial Stability Facility has €440bn ($618bn) available to lend to member states in difficulty, but there are concerns it would need to be expanded to €1.6tn to bail out Italy alone.

Independent eurozone economist Megan Greene said the EU will disintegrate if Italy and Spain follow Greece into insolvency.

"I don't know if the EFSF can bail out Spain. But definitely not Italy AND Spain," said Greene.


She said the European Union needs greater fiscal and regulatory consolidation or it will fail.

"Given the Governments seem unwilling to act on fiscal consolidation I think a eurozone break up is where we're headed."

Spanish MP Alvaro Nadal, insisted talk of bailouts without serious economic reform was "like talking about the dressing of the salad without the vegetables. The vegetables are important, if you have vegetables, you can have any flavour of dressing you like.

"We need sound economic policy combined with stability."

Nadal told the forum he expects his Partido Popular party will be the majority Government in Spain within a few months.

He said the EU needs to progress economic reform in Spain and Italy before bailing out Greece.

"Where is the problem? It's in Spain, Greece is just an anecdote. We need to fix Spain otherwise the EU won't work" said Nadal.

He outlined a number of "deep" reforms that are urgently needed in Spain, including labour laws, fiscal stabilisation, regulatory reform and pension reform.

"This is what people in the market are saying, 'These Spaniards are not going to do it. The reforms are so deep.' So this is where it becomes a matter of politics and political will."

Pascual said the ECB and the EC should take immediate action to
address market concerns and stop the problems in Greece spreading to
Span and Italy.

"The EU is dominated by concerns of contagion. A restructure of Greece alone will not solve the problem."


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