Sunday, June 10, 2012

TARPing for Time

Paul Krugman doesn't seem too optimistic about the Spanish bailout: The Eurotarp Cometh.

The Spanish banks will get some money, and the Spanish government will owe more money to somebody, but says Krugman, the underlying problems of Spanish competitiveness and austerity are not addressed. What has been bought, he says, is time.

The question you should ask is, what problem does this solve? It may — may — put a temporary end to the “doom loop” of funds fleeing Spanish banks, forcing the banks to sell assets, driving asset prices down and creating further doubts about solvency. (It won’t help even here to the extent that fears involve euro breakup rather than default). But it does nothing to restore Spanish competitiveness or lessen the suffering from austerity.

So the whole thing at best buys time — just like the ECB’s lending program from last fall. What will Europe do with that time? If past behavior is any indication, the answer is, nothing.