The ship is sinking. Spain is the fourth largest economy in the eurozone, and nothing is going right for it. Bad real estate loans in a collapsing housing market are pushing the country toward a huge bailout of sick banks. Unemployment is at a Depression level of 24 percent; youth unemployment is at 50 percent. Interest rates on the country’s debt are up sharply and its credit rating has just been downgraded. The Spanish government has no idea what to do.An unemployment rate of 24%. And the voters don't want to make any changes. Hmmm. I wonder how long the German people are going to want to subsidize the Spanish. And the Greeks. And the Italians. And all the others.
The countries in Europe, especially those in the South, have reached a point where reforms to the core social model are needed—soon—to avoid a catastrophic breakup of the eurozone. But voters in those countries don’t want the changes to be made.
In theory, there is a way to resolve this. The wealthier countries in the zone (which means Deutschland, über alles) would underwrite the debts of the laggards as the laggards gradually made reforms and reduced their spending. That would make the reform process easier and promote some growth in Europe.
But the Germans believe — and they are almost 100 percent certainly right — that the Club Med countries plus Belgium and France will use any breathing space they get to water down or postpone reforms. After all, when they signed up for the euro, the Club Med countries knew that they needed to undertake ambitious reform programs to sustain their membership in the monetary union and they refused to do anything serious — especially in the super-sensitive area of labor markets.
This has been the problem from the beginning: Club Med doesn’t want to live under German rules and Germany doesn’t want a Club Med currency. Club Med can’t make Germany underwrite the Club’s lavish lifestyle and Germany can’t make Club Med live by German rules.