A key auction of Spain government bonds went well this morning, which has traders breathing easier: Maybe Spain won’t be a crisis after all.
The longer-term view is decidedly less comforting.
For the past five years, Europe as a whole–and Greece, Spain, Italy, and especially–have been the epitome of a slow-motion train wreck. Although Europe’s leaders have managed to find a way to get through a series of successive mini-crises, the situation as a whole continues to get worse.
And this is not surprising. Because the fundamental problem in Europe still hasn’t been addressed:
The basic structure of the Eurozone, in which efficient, rich countries like Germany operate with the same currency as inefficient poorer countries like Greece and Spain without the richer countries subsidizing the poorer ones simply won’t work.
For the Eurozone to permanently solve its problems, one of two things has to happen:
- The Eurozone needs to break up and go back to different currencies, or
- The richer countries need to subsidise the poorer ones
For everyone involved, solution 2 would be a better outcome. And maybe Europe will get there. But, for now, that solution still really isn’t even on the table.
Meanwhile, the situation in Spain and Italy continues to deteriorate. And it will inevitably lead to more bailouts and debt restructurings, just the way it did in Greece. The only question is when.
Here’s a look at the 10-year bond yields of both countries, along with the U.S.:
SPAIN: Better in the last couple of days, but a lot worse than several years ago.
ITALY: Same trend (though better than Spain).
For context, here’s the U.S., which has plenty of financial problems of its own:
SEE ALSO: Phew… The Spanish Bond Auction Went Fine