Spain has become the latest eurozone country to ask for help, on this occasion for its banking sector, from its partners in the single currency bloc. Madrid has been careful not to call this a bailout, but financial assistance for its banks, which have suffered tremendously since the property bubble burst. It is,in fact, a bailout for Spanish banks worth €100 billion, but Spain is too proud to use the “bailout” word.

We’re the number four power in Europe. Spain is not Uganda- Spanish Prime Minister Mariano Rajoy

In fact Spanish Prime Minister Mariano Rajoy sent an SMS to his Finance Minister during the negotiations on the terms of the assistance for Spain’s banks in which he urged him to get a good deal for the country. He ended his message by saying: “We’re the number four power in Europe. Spain is not Uganda”. Understandably, Rajoy’s remark caused a storm of protest in Uganda, but highlighted Spanish sensitivity about having stringent conditions attached to any financial aid.

Rajoy has made it clear that his government’s domestic reforms had prevented the country from needing a full-scale bailout, and stressed that the assistance Spain is to receive will go only towards recapitalising the country’s banks. He emphasised that unlike other eurozone countries that needed a bailout, Spain would not be subjected to any austerity measures imposed by the EU, the European Central Bank and the International Monetary Fund (the so-called “troika”). Spain, he pointed out, was already imposing its own set of austerity measures aimed at fiscal consolidation.

Of course, this is not to say that the troika will not be carefully monitoring Spain’s financial sector and insisting on reforms in this area. European Commission Vice-President Joaquin Almunia said last week that “whoever gives money, never gives it for free”. It is clear that as a result of this deal, the Spanish government will have to make further reforms of its financial and banking sector.

The markets initially reacted positively to the eurozone granting financial assistance to Spain’s banks, but market optimism soon faded as it became clear that if fully drawn, the €100 billion eurozone loan would add 9.5 percentage points to Spain’s national debt. In fact, Spain’s borrowing costs on Thursday rose to a euro-era record of seven per cent, a level which many analysts believe is unsustainable in the long term. Shortly after, Moody’s rating agency lowered Spain’s credit rating, saying the eurozone plan to help Spain’s banks would increase the country’s debt burden and pointing out the weakness of the Spanish economy and the government’s difficulties in borrowing from financial markets.

To makes matter worse, Italy’s borrowing costs also rose last week and Cyprus, which is heavily exposed to the troubled Greek banks, said it may seek an emergency bailout to rescue its economy. Furthermore, Greece goes to the polls today and voters may elect the leftwing Syriza bloc that wants to cancel the terms of the country’s bailout. That would almost certainly force Greece to leave the eurozone, plunging the single currency area into a deeper crisis.

The eurozone crisis has dragged on for years now and Europe seems unable to speak with one voice on this issue, although it has taken steps to address the situation. It is not surprising that Canadian Prime Minister Stephen Harper recently told the Financial Times: “We’re four years into this crisis and we’re still trying to get a sense of what the game plan is. We need measures that are going to be decisive.”

A breakup of the single currency and a prolonged recession in the eurozone would have severe consequences for the global economy, not only for Europe, so it is understandable that leaders like Harper have expressed dismay at the turmoil engulfing the eurozone. And although Malta’s economy is performing well compared to many other EU member states (yes, we are technically in a recession, but we’ll have to wait and see whether this is a temporary blip) our economy will be badly affected should the eurozone break up or enter a prolonged recession.

All eyes will now be focused on the June 28-29 summit of EU leaders which is expected to come up with some concrete proposals for increased eurozone integration as the only way of saving the eurozone, including the formation of a banking union which would place all EU banks under the supervision of one European banking authority.The draft conclusions of this summit, which have appeared in some sections of the media, says that the eurozone needs much stronger banking and fiscal integration and enhanced governance.

“Recent developments have demonstrated the need to take Economic and Monetary Union to a further stage,” the draft conclusions point out.

“The new stage will build on deeper policy integration and coordination. There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance,” it said.

The summit will also have to find a happy compromise between France’s demands for economic growth incentives to get the EU economy moving again and Germany’s insistence against financing growth through new debt. One thing is for certain: time is running out for the eurozone’s long- term survival and this month’s EU summit will have to be ready to take drastic decisions, especially in the light of a likely left-wing victory in Greece, in order to calm the markets and install confidence in the single currency.

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