Europe’s Spain Bank Bailout Plan Won’t Work

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Joseph Stiglitz, a Nobel Prize-winning economist has recently stated that Europe’s plan to bailout Spain’s banks won’t work because the government and the country’s lenders will just be propping each other up.

The Spanish banks have recently taken a massive hit due to the bursting of the real estate bubble, recession and the rising unemployment rates. The plan, agreed to on Saturday by euro zone finance ministers, involves lending up to 100 billion euros to Spain to alleviate the country’s current situation. This figure is bigger that most estimates of the needs of the Spanish banks.

In 2011 much of the Spanish debt was bought up by the Spanish banks and the concern now is that by helping the banks with this bailout, the government may end up having to ask for help from the same institutions once again. In an interview on Friday Stiglitz said, “It is not going to work and it’s not working.”

Stiglitz believes that what the European Union has done so far has been minimal and wrong in its policy direction. Instead, he said, sweeping reforms need to take place which would make Europe more of a fiscal union, something that is needed to solve the debt crisis, reinforce the euro as a currency and help Germany which, as the richest country in the union, has to bear the highest cost of guaranteeing any commonly issued debt.

As the euro crisis continues, countries like Spain, Greece Italy and Portugal are contracting; however, Germany actually saw a growth of 0.5 percent in the first quarter. While Germany has escaped the crisis largely unscathed up until now, Stiglitz says they are going to have to face a tough question: “Do they want to pay the price that would follow from the dissolution of the euro, or do they want to pay the price of keeping the euro alive?”

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