Spain in crisis (2007-2014). A view from the Eurotower

This book offers in four volumes a detailed narrative of the crisis in Spain (2007-2014), from the perspective of someone who followed it closely at the European Central Bank:

• Volume I. From the financial crisis to the sovereign debt crisis (2007-April 2010).
• Volume II. Spain delays being rescued (May 2010-July 2011).
• Volume III. Rescuing Spain (August 2011-July 2012).
• Volume IV. Overcoming the crisis (August 2012-2014).

The third volume, covers the last stages of the process leading to the rescue of the Spanish economy. In August 2011, the ECB intervention in debt markets buying Italian and Spanish debt barely contained the financial market pressures on bond yields, giving time for both governments to implement measures recommended by their central banks to restore investors’ confidence. Unable to adopt a more resolute approach, Zapatero took minor emergency measures and reformed the Spanish Constitution, the only initiative that the opposition was ready to support. However, the decision to restructure Greek debt and the insufficient action of the Italian government exacerbated the nervousness of financial markets and led to the fall of the Papandreou and Berlusconi governments in November.

After general elections in Spain Rajoy’s conservative government replaced Zapatero’s socialist government and pledged to consolidate public finances, undertake serious structural reforms and restructure banks. In 2012 an austere fiscal policy was implemented and an effective labor market reform enacted. Other reforms were less ambitious and the previous strategy of restructuring banks without committing public funds to clean up their balance sheets was continued and failed. The financial drain of the Spanish economy was severe and the governor of the Banco de España thought that country would be “kicked out of the euro”. In the summer of 2012, the Spanish government had to request financial help to complete the restructuring of banks.

In the meantime, tortuous debates over reforming the governance of the European monetary union to prevent future crisis and establishing an effective mechanism to manage them led to the strengthening of fiscal rules and the creation of the European Stability Mechanism. To break the link between banks and their national sovereigns, which was at the heart of the financial crisis in Europe, a “banking union” project was agreed to put supervision of banks under the ECB and unify banking regulations and restructuring procedures. With these premises, the ECB could launch its Outright Monetary Transactions program, which would complement the stability mechanism to manage future sovereign debt crisis.