The problem is Spain, which dropped two stink bombs on the world. First, the cost of bailing out just one of Spain’s many doomstriken banks shot up from €4.5 billion ($5.6 billion) to €23.5 billion ($29.5 billion). This is money that Spain’s cash strapped government doesn’t really have; it is under orders from Brussels to reduce its budget deficits and has already slashed spending even as youth unemployment hits a Detroit-level 50 percent. This news isn’t just bad in itself; it means that the other zombie banks in Spain (and there are plenty of them) are going to be much, much more expensive to rescue than previously believed.
The other piece of bad news is potentially even worse. This came in the form of a statement of the president of Catalonia that his regional government is running out of money and needs a bail out of its own. Catalonia, a region in northeastern Spain which speaks its own language and hosts an independence movement, is as the FT notes bigger than Portugal in terms of GDP and accounts for one fifth of Spain’s economic activity.
Spain and Italy and others are not different from Greece. Margaret Thatcher's truth still holds -- "The problem with socialism is that you eventually run out of other people's money."
What is beginning to look likely in Spain — that the financial meltdown of the country is imposing burdens that the political system cannot sustain — could also be true of Europe as a whole. Europe’s policy makers think they see a path — difficult, but possible — on which Europe could tiptoe past a Greek meltdown and still hold together. It has always been much more difficult to imagine a way to handle a meltdown of Spain with its much bigger economy and its greater population.
The greatest hope for a non-catastrophic outcome to the European crisis has for some time been that Greece really was sui generis and that the other Club Med members could somehow limp into port even as Greece sank. The recent news from Spain suggests that it, too, may be holed below the water line.