But extended debate may fast become a luxury as economic activity in Spain slows, the cost of a banking-sector rescue rises and the euro zone’s uncertain future scares off investors.
The release Tuesday of discouraging figures on Spain’s retail sales and exports further contributed to the sense of the country’s fragility. And the resignation of Spain’s central bank head, a month ahead of schedule, highlighted the struggle to fix long-standing problems in the country’s financial sector.
Underscoring the urgency of the situation, U.S. Treasury Undersecretary Lael Brainard arrived in Athens on Tuesday for a previously unannounced European trip that will include stops in Madrid, Frankfurt, Paris and Berlin. The purpose, according to a release, was to “meet with senior government officials in each country to discuss their plans for achieving economic stability and growth in Europe.”
U.S. officials have been having similar conversations with European officials for more than two years, citing slow growth, high public debt and the potential for a major financial crash in the euro zone as a chief risk to the U.S. and global economies.
But the discussions have become even more pressing with mounting worries about Spain’s weakening condition and upcoming elections in Greece that could push that country toward an exit from the euro zone.
The euro zone has set up a range of programs in response to the crisis, providing hundreds of billions in low-interest bailout loans to Greece, Ireland and Portugal and establishing emergency funds to help others.
Yet those steps — which represent a once-unthinkable transfer of wealth from rich euro nations to struggling ones — have not extinguished the ultimate risk: that the currency union may crack apart.
The fallout from a Greek exit would be unpredictable, with investors likely to pull money from the entire 17-nation region and banks likely to further slow or shut down lending. Analysts put the potential cost at hundreds of billions of dollars in lost economic activity. Greece’s departure could also deal a fierce blow to overall confidence in the euro, with investors uncertain about whether other struggling countries would follow suit and drop the currency.
The impact could be felt most deeply in Spain. Bond investors already seem to be abandoning it. Bank and economic analysts cite a steady outflow of cash from the country this year, and the interest rates on Spanish government bonds have been rising to record levels, reflecting the increasing unwillingness of investors to lend it money.
Calls are mounting for euro-zone leaders to take fast action to show they will stand behind Spain and help the country avoid the steady rise in interest rates that pushed Greece, Ireland and Portugal to need outside help.
Bailouts in those three countries stretched the ability of the euro-zone countries and the International Monetary Fund to respond. A bailout for Spain would be far more costly.
European leaders are debating steps that might stem the potential for “contagion” from Greece to hurt Spain. Ideas include larger common investment funds that could be used for job-generating infrastructure projects and jointly issued bonds that would allow weaker euro-zone nations to benefit from the stronger credit standing of nations such as Germany. The European Central Bank could restart its program of buying bonds of individual nations to help hold down interest rates, loan more money to banks as it did earlier this year, and take even more dramatic measures.
A European summit in June is expected to produce a “growth compact” to complement the austerity programs urged by Germany — and blamed by some economists for the onset of recession in Italy and Spain.
Recent news about the Spanish economy has not been encouraging. Data released from the national statistics agency and the Spanish central bank indicated a sharp drop in retail spending in March, a continued contraction in gross domestic product and, perhaps most worrisome, a slowdown in the country’s exports.
Spain’s export sector has been one of the few props of an economy that is registering 25 percent unemployment. The central bank’s monthly economic report, covering March, showed exports dropping 2.3 percent and demonstrated the corrosive dynamic at work in the euro region. Spain’s auto sector, once a major export strength, reported a particularly sharp slowdown in sales to the other struggling euro-zone nations of Italy and Portugal.
Meanwhile, the likely cost to the government of rescuing the country’s banking sector continues to rise. Some analysts estimate this could push Spain’s overall public debt to unsustainable levels. The government is in the process of nationalizing the Bankia conglomerate of savings banks, and last week it was revealed that the company would need tens of billions of dollars more than expected.
Spain’s government has ordered banks to set aside more money to account for troubled property-development loans, but it remains unclear whether those new provisions will be adequate as property prices continue falling and the economy remains in recession.
Unlike the United States and Ireland, where a quick recognition of bad loans helped banks recover faster, Spain has allowed the problem to linger for years after the crash of its property markets. The delay was based on hopes that an economic recovery would solve the problem and avoid an unpopular bank bailout.
A key architect of that policy, Bank of Spain Governor Miguel Fernandez Ordonez, announced Tuesday he would leave office a month early so the government could appoint his replacement and speed plans for a deeper overhaul of the country’s financial system.