Unemployment Rises, Construction and Manufacturing Fall, And Everything Continues As Per Usual In Spain

Spanish unemployment shot up again in February to 3.48 million in February, whilst consumer confidence took another knock amidst fears Spain's jobless would now hit 4 million as early this summer, and maybe 4.5 million, or nearly 20% of the workforce. Right, this the latest in my monthly reports on Spain, but before I go further, a quick joke. How do you know when there is an economic crisis in a country? When everyone around you in the metro is busy reading the economics page in the newspaper.



The latest unemployment data released yestreday (Tuesday) show that the number of unemployment benefit claimants rose by 154,058 in February, down from last months increase of 198,838, but still nearly four times the 40,000 increase in Germany which has almost twice the population, and where the economy is apparently contracting at an even more rapid rate. Could we conclude that one stimulus package is working rather better than the other?

This month's jump in the jobless number took the Spanish total to its highest since records began in 1996.

According to Eurostat, Spain's harmonised unemployment rate rose to 14.8% in January, and has obviously passed the 15% level in February. This is the highest rate anywhere in the EU, and makes it hard to makes sense of all those rapid response comments which shot from the hip against Central Bank Governor Fernandez Ordoñez's suggestion that Spain needs urgent labour market reform. Frankly such an Ostrich mentality makes Spain look simply ridiculous, and will make it very hard to ask for the much needed aid in fighting the crisis from the rest of the European Union.



Employment, measured in terms of full-time equivalent job posts, decreased 3.1% in the fourth quarter of 2008, that is, 2.2 points below that from the previous quarter. This result indicated a decrease of almost 602 thousand net full-time job posts in a year. As with the previous quarter, the services branches were the only branches that, on an aggregated level, generated an increase of employment in the economy (almost 140 thousand).





The data is simply piling pressure on more pressure for Prime Minister Zapatero to come out of his bunker and begin to urgently look for economic substitutes to the credit-fuelled construction and consumer spending boom which drove Spain's recent 15 year growth "miracle". It is clear that the measures introduced to date simply aren't working, nor were they ever goping to.

We are seeing stimulus measure after stimulus measure, but all these projects seem to be doing is retaining labour in the construction sector (labour which needs to be shed) while the factories close, and the service sector steadily shrinks.


Construction Slumps in January

Construction output in the 27 EU countries was down in December by 6.7% when compared with December 2007. The building sector was the hardest hit, with a 7.7% year-on-year fall, while civil engineering activity was only down by 1.3%. Of those countries reporting data, the biggest fall, as had been the case in the previous month, was in Spain, were activity was down by 23.7% year-on-year. Spain was followed by Sweden (-19.6%), Portugal (-6.2%), France (-5.2%) and Bulgaria (-5.2).

Contsruction activity has now been falling in Spain since the start of 2007.

On a quarterly basis we can see that the rate of decrease is increasing, from 4.6% in Q3 to 8.0% in Q4 2008. Also construction activity is now begining to fall back as a percentage of GDP. although the rate of decline is still comparatively slow, since GDP itself is falling. As we cab see from the chart below, simply to return to normality we need to get back to around 5% or 6% of GDP, but given the large housing surplus that now exists in Spain it would not be surprising if activity fell to significantly belwo this level, and remained there for a number of years.



Home sales also dropped at an accelerated rate in Q4 2008 according to Spain's College of Registrars. Some 113,274 homes were bought and sold in the fourth quarter, down 13.5 percent from 130,884 in the third. The drop was sharper than the 8.6 percent fall between the second and third quarters. For 2008 as a whole, sales (561,420 of them) were down 28.8 percent from 2007. The average value of Spanish mortgages declined for a fourth consecutive quarter, falling 1.84 percent year on year to 136,148 euros.


Spain's Manufacturing Continues To Contract

Spanish manufacturing conditions continued to deteriorate in February at levels similar to those seen in January, though they are now significantly off December's record low. The Markit Purchasing Managers Index rose in February to 31.8 from 31.5 a month earlier, both readings significantly off December's record low of 28.5.

"Although the headline PMI ticked up again in February, operating conditions remained extremely tough. It is still too early to start talking of a recovery in the Spanish manufacturing sector," said Markit economist Andrew Harker.

Over half of those surveyed reported lower orders in February due to falling demand and noted particularly sharp declines in demand from abroad, especially Europe. Both output and input prices slipped to record lows as the economic environment deteriorated, with raw material prices easing and producers cutting prices to stimulate demand.

"The series record falls in both input prices and output charges signal that deflationary pressures are set to intensify, with consumer price deflation possible in the near future," said Harker.

Perhaps the long and steady decline in Spain's industrial sector is clearest in the output index chart (below).




Services Sector Continues To Contract and Sheds Employment

Spanish service sector activity fell steeply in February, prompting the deepest jobs cuts on record and deepening pessimism over how long the country's recession will last, PMI survey data showed. The pace of decline among firms fell to 31.7, way below the 50 level where growth starts, compared with 31.8 in January and a series low 28.2 in November, according to the Markit Economics Purchasing Managers' Index published on Wednesday.




Mortgages Down

Spanish mortgage lending fell rapidly again in January, with loans to housebuyers running at almost half the level of January 2007, according to Bank of Spain data.4.24 billion euros were lent in new mortgages during the month, the lowest level of mortgage lending since the financial crisis began, and a drop of 49 percent from January 2008. The figure revealed a marked decline in borrowing by Spanish families, following a 42.7 percent drop in December. Over 2008 as a whole, the value of mortgage loans to families fell by 40 percent. The Bank of Spain also reported this week that the volume of consumer credit fell 36 percent year-on-year to 2.45 billion euros in January. In fact lending to households fell 4.3 billion euros between November and December (see chart below) only the second time that this has happened in the course of this crisis.









Trade Deficit Falls

Spain's trade deficit fell 29.5 percent in December to 6.93 billion euros but the main factor responsible was the very strong fall in imports, which were down by 16.5 percent from December 2007, while exports fell by 7.4 percent, according to the Spanish Industry Ministry.



The steep fall in Spain's trade deficit has reduced negative contribution to gross domestic product coming from external trade, and this means that GDP, which fell by 1 percent in quarterly terms in the fourth quarter of 2008, is not contracting as fast as indicators of domestic demand, such as retail sales, would imply. A big contribution to the smaller deficit came from lower oil prices, which helped to reduce energy imports by 19 percent. Capital goods imports fell sharply (by 18 percent), while imports of manufactured consumer goods, on the other hand, were up by 7.5 percent. This is not good news, since it indicates the fundamental lack of competitiveness of Spanish industry, for a recovery to occur the relation would have to be the other one, with capital goods rising, and manufactured imports falling.

Spain's trade deficit fell by 4.9 percent in 2008 (to 99.1 billion euros), the first annual fall since 2002. Exports rose by 3.7 percent and imports increased by 0.6 percent.

Spain's trade deficit is the main contributor to Spain's current account deficit which was still running at about 10 percent of GDP over the year as a whole. This deficit has been funded by credit from abroad, a factor which is heavily responsible for the the large accumulation of private sector debt which now weighs so heavily on the Spanish economy.

In fact the December current account deficit came in at 6.37 billion euros in December, down from a deficit of 8.54 billion euros in November, and down from the 9.06 billion euro deficit recorded in December 2007, according to the Bank of Spain last week.

While The Fiscal Deficit Grows

Spain recently reported a higher-than-anticipated deficit of 3.8 percent of GDP for 2008, but the government committed itself to bringing the shortfall back close to the European ceiling of 3 percent by 2011. Spain's Economy Ministry had forecast a deficit equal to 3.4 percent of gross domestic product (GDP) in 2008 following a record 2.2 percent surplus in 2007 that was the second largest in the euro zone. The government currently expected the deficit to peak at 5.8 percent of GDP this year, but most observes consider this a highly optimistic forecast, especially since the economy is almost certainly going to contract more than the current government estimate of a 1.6 percent contraction (on which the budget is based).

The European Commission also remains unconvinced, and has initiated an excess deficit procedure, as indicated below:

Spain is undergoing a sharp contraction of economic activity as a result of the global economic and financial crisis and a severe correction in the housing sector, both taking their toll on public finances and on employment. Since the first half of 2008, the Spanish authorities have also adopted various discretionary measures to stimulate economic activity, in line with the EU Recovery Plan, including tax cuts and investment projects, amounting to 2¼% of GDP in 2009, as well as a series of structural reforms.

In 2008, for the first time in several years, Spain is estimated by the Commission and in its Stability Programme sent mid January to have recorded a budget deficit estimated at 3.4% of GDP. The programme puts the figure this year at -5.8% before a gradual fall to below 4% in 2011. However, the favourable macroeconomic assumptions may imply a lower contribution of economic growth to fiscal consolidation than envisaged and the adjustment path is not fully backed up with concrete measures, except for the discontinuation of the 2009 stimulus package. In this context, a careful assessment of the budgetary impact of discretionary measures will be crucial to ensure the improvement of the medium-term budgetary position, as well as of the long-term sustainability of public finances.

Public debt, which had been reduced to 36.2% of GDP in 2007, is expected to grow to above 50% in 2010.

Based on this evaluation, the Commission proposes three policy invitations for Spain, which focus on: (i) Implement the measures in line with the EERP as planned, while avoiding a further deterioration of public finances in 2009, and carry out with determination the planned structural adjustment in 2010 and beyond, backing it up with measures, and strengthening the pace of budgetary consolidation if cyclical conditions are better than projected, (ii)

In view of the ongoing fiscal deterioration and of the projected impact of ageing on government expenditure, iImprove the long-term sustainability of public finances by implementing the adopted measures aimed at curbing the increase in age-related expenditure; (iii) Ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public finances as planned in the light of the needed adjustment of the economy to address existing imbalances.

In parallel with its assessment of the programme, the Commission is adopting a report under Article 104.3 of the Treaty – on the basis of the breach of the 3% of GDP reference value in 2008. While the deficit remained close to the 3% reference value, the deficit cannot be said to be the result of a severe economic downturn as GDP growth was still positive (over 1%). The excess over the 3% is also not temporary as, according to the programme, it will remain above that level until 2011.

Consumer Confidence Slides

Meanwhile, Spain's Instituto de Crédito Oficial (ICO) reported this week that consumer confidence declined in February after showing some slight recent improvement. The ICO consumer sentiment indicator dropped to 48.6 in February from 50.1 in January and 76.8 recorded in February 2008. The decline in the headline index was mainly due to a fall in the sub index for current economic conditions, which dropped to 26.3 in February from 29.1 in January. The index is now starting to hover dangerously near the July's historic low.


As can be seen from the chart for the sub-components, the only factor holding the whole index up at the moment is the expectations component, when that shoe falls the index could well see another sharp drop.



The consequence of all the rising unemployment and declining confidence is obvious, retail sales have entered a long and sustained decline.




Goldman Downgrades Spanish Banks


Goldman downgraded Spain's second-largest bank BBVA this week, changing the rating to "neutral" from "buy."

"The valuation levels of the domestic banks do not appropriately reflect the
credit risk embedded in these businesses and we remain cautious on these,"
Goldman said in a note to clients.

Goldman cut its price targets on several Spanish banks, saying that the capacity to withstand credit losses would be a key differentiator among the banks. Goldman said they considered Banco Santander and BBVA to be the best in this respect, while Banco De Sabadell, Banco Popular Espanol and Banco Pastor all seemed weaker.

Goldman also said credit quality looked significantly weaker for most Spanish banks, particularly Sabadell, Popular and Pastor, in terms of non-performing-asset rates and coverage, while BBVA and Bankinter were less affected. Goldman said it continued to prefer BBVA over Santander, particularly in view of Santander's UK exposure.

Finally to close with the news my fellow passengers were all so busy reading this morning on their way to work, Spain's second largest bank BBVA have forecast that the Spanish economy will shrink by 2.8 percent in 2009 and 0.3 percent in 2010, and that unemployment will rise to 19.7 percent. That is still below my expectation for a 5 percent contraction, but it is significantly below the government forecast of a 1.6 percent contraction this year and 1.2 percent growth (can anyone seriously believe this?) and 15.7 percent unemployment in 2010.

Europe's Economic Contraction Intensifies In February

Hopes that Europe's battered economies might be about to turn themselves around took another sharp knock today (Friday), as the preliminary flash reading on the purchasing manager survey signaled that activity in both the manufacturing and the services sectors are contracting at a new record pace in February.

The preliminary Markit euro-zone manufacturing purchasing managers index, or PMI, fell to a record low of 33.6 in February from 34.4 in January, while the services PMI also fell to a record low, dropping to 38.9 from 42.2 in January. As a consequence the euro-zone composite PMI reading dropped to its own record low of 36.2 from 38.3 in January. Any reading below 50 on these indexes indicates month on month contraction.

Barring some spectacular (and entirely improbable) turnaround in March it now seems likely that the Q1 GDP contraction will be worse than the Q4 2008 one. If we consider that the eurozone contracted by 0.2% in Q3 2008, and by 1.5% in Q4, then, in my humble opinion, the data we are seeing for this quarter are entirely consistent with a 2% quarterly contraction (or an annualised 8% rate of contraction). Not quite Japan territory yet, but not far behind. And for those who simply don't believe the PMIs can tell you so much, here is Markit's own chart, showing the strong underlying relationship between movements in GDP and the *flash* composite PMI. Pretty impressive I would say.




Germany's Contraction Intensifies


The German service PMI came in at at 41.6, showing the fifth consecutive month of contraction. This was a sharp drop from last months 45.2 reading, and means that the recession is now feeding through from manufacturing to services. The difficult conditions have lead service business owners to hold to the grimmest outlook in the last decade, that is since the index was started. More ominously, the recent data points to a strong reduction in the employment level.



On the other hand February saw the tiniest of upticks in the manufacturing sector, since the PMI came in at 32.2, from January's 32 , the best that can be said here is that the rate of contraction may have stabilised.



France Holds Up Slightly Better Than Most

In France, the manufacturing sector (see chart below) gave up on most of January's rebound, and the PMI fell to 35.4 from 37.9 in January, while services (see chart above) slipped to a record low of 40.1 from 42.6 in January. Nonetheless France is visibly performing rather better than Germany, and when all this is over we will have plenty of time to hold the debate as to why that has been.

The EU Bonds Story Rumbles On

Wolfgan Munchau was complaining only last weekend about the extraordinary narrow-mindedness of Europe's economic and political leadership in the face of the current financial and economic crisis, from Ireland in the West to Hungary in the East, and from Greece in the South to Sweden in the North. But more than narrow mindedness what we are faced with is innocence and inability to react, and frankly I am not sure which is worst. I say "innocence" because it is by now abundantly clear that they simply haven't yet grasped the severity of the problems we face (in countries like Spain, or even Germany itself, let alone in the East), and I say inability to react, since they are always and forever moving too little and too late. The initial response to the banking crisis last October was one example (where we saw a landshift-style volte face in the space of only one week) and the way we are now confronting the need to live up to the promises then made about guaranteeing the banking sector, and in particular the "systemic" banks, would be another.

The complete confusion which seems to reign over at the ECB about whether or not the Eurozone can operate some sort of US/Japanese style quantitative easing would be a third.

Only today we are faced with yet another example of how our leaders are meticulously dangling their toes in the icy water where a more seasoned mariner would simply see the need to dive straight in and rescue the drowning man.

It is reported this morning that Germany and France are now contemplating the possibility of bailing-out entire nations, rather than simply individual banks, as European government budget commitments steadily mount-up while their sovereign debt ratings start to buckle under the weight of a growing and deepening European recession.

As reported in my post yesterday (here) German Finance Minister Peer Steinbrueck became the first senior European politician to broach the topic earlier this week, when he stated that some of the 16 euro area nations are now “getting into difficulties” and may need help, citing Ireland as an example. French officials are also reportedly concerned about how the current "stand alone" sovereign debt situation is leading to widening spreads on Austrian, Irish, Greek and Spanish debt as the cost of insuring against default rises to records. What we have before us is not simply a case of seeing "fiscal irresponsibility" punished, it is a mechanism whereby the eurozone can be peeled apart, and where those states who enter a negative economic growth-bank bailout-fiscal deficit dynamic which means the cost of financing their debt (and thus their bank bailouts) rises so prohibitively that it virtually excludes the possibility of giving further fiscal stimulus to their sinking economies, and does so in such a way that a self reinforcing (and self fulfilling) process may be produced, a process which only leads in one direction and to one conclusion: that of sovereign default.

The problem is that it is not just one or two quarters of negative growth we are talking about here, we are talking of deep depressions, and ones during which deep structural damage can be inflicted on the economies of those states who are hardest hit.

“When push comes to shove Germany, France, the larger players will bail out those smaller peripheral players,” said Alex Allen, chief investment officer of Eddington Capital Management. “You can’t let one part of the system fail because it leads to failure of the whole system.”

European deficits have evidently surged enormously this year as governments are faced with the need to provide funding for the heavily strained banking system and provide some kind of stimulus to their rapidly contracting economies. EU member states have already committed more than 1.2 trillion euros in an attempt to save the banking systems from collapse, and it is evident that a second and possibly larger wave of bailouts may now be imminent.

In particular many of us our now concerned that the eurozone bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers in September 2008. As ECB board member Lorenzo Bini Smaghi put it earlier this month there’s a “risk that the mistrust that there is today in financial markets” is “transformed into mistrust in states.”

“I would be very reluctant to say: ‘O.K., let Ireland or Greece default, the market will sort it out, punish them for their irresponsibility of the past,’” said Thomas Mayer, co-head of global economics at Deutsche Bank AG in London. “They tried it with Lehman and realized that was not a good idea.”

The Spreads Widen



The gap between the interest rates Greece, Austria and Spain must pay investors to borrow for 10 years and the rate charged Germany yesterday rose to the widest since before they adopted the euro. Credit-default swaps on Ireland rose to a record on Feb. 16, climbing to 378.4 points. Greek credit-default swaps, 270 points on Feb. 16, show a 4.5 percent chance that the country will default in the next 12 months, according to ING Bank NV.

Are Bailout's Possible Under Maastricht?

The simple answer to the above question is most emphatically yes, under article 119 of the Treaty. As follows:

Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty.

Which in plain English basically means, through you go with your proverbial coach and horses. Indeed they may well have already been driven through, last November, in the case of Hungary.

“The European Commission stands ready to provide a loan of €6.5 billion to Hungary,” the EU executive said in a statement on Wednesday (29 October), adding that “the concrete modalities will shortly be finalised in cooperation with the Hungarian authorities”. Under the plans, the Commission will borrow money from the markets using EU-denominated bonds and then lend it to Hungary, without drawing from the EU budget. The facility is established under Article 119 of the Treaty.It is the first time that Brussels has used the instrument to help an EU country (see background). The facility foresees an overall ceiling of €12 billion of outstanding loans. This funding is limited to EU countries which are not part of the euro zone.

The €12 billion ceiling currently provisioned for in the bond facility has not so far been reached, but it has long been evident that other Eastern EU countries would need to draw from the facility for financial help. Thus it is hardly surprising to learn that French President Nicolas Sarkozy had already proposed raising the ceiling to €20 billion at an EU summit on 7 November.

"I will propose on 7 November that the European Union itself, which has 12 billion available to support a certain number of liquidities and to support a certain number of states, should go up to at least 20 billion (euros) to increase our capacity to respond to the crisis," Sarkozy said, according to Reuters.

As one EU official told journalists at the time "the Commission could also change the regulation and lift the ceiling". Or, in other words, when needs must, it will.

A Little History

The principle of borrowing money from financial markets on behalf of the European Community has previously been applied to grant aid to extra-EU countries, in particular before the 2004 enlargement. Kosovo, Moldova and Georgia are all currently receiving financial help through EU loans raised on the market. In January 1993, Italy, a member of the European Community (the EU's forerunner), was granted an eight billion ECU loan to support its strained balance of payments. Since then, no member state has received financial help through this instrument.

The idea of borrowing money via the issue of EU bonds was first launched by former Commission President Jacques Delors via his 1993 plan for growth, competitiveness and employment. Delors initially wanted EU bonds to fund the European budget. But the majority of member states opposed the idea, fearing it would ultimately increase their expenditure on the Community budget.

Borrowed money has been used by the EU to fund projects in several cases, although the amounts involved have been small. For instance, a 'New Community Instrumentexternal ' was used in the late 70s and early 80s to help regions affected by earthquakes in Italy and Greece. Italy has recently proposed using European bonds to fund key EU projects, but the idea garnered little support

The gateway for the coach and horses is also being prepared on another front, as the Financial Times reports this morning. In this case we are talking about the European Investment Bank, which, according to the FT, is set to lend the European car industry 7 billion euros in the first half 2009 to support the manufacturing of environmentally clean vehicles. This is already a substantial increase on the approximately 2 billion euros a year the bank extended to the industry before the crisis, and there may be more, much more, to come. Pathways are being prepared, even as the wheels on the coach are oiled and the horses' mains groomed.

Philippe Maystadt, the bank’s president for the past decade, revealed the €7bn figure to the Financial Times, as he explained the EIB’s plans to shoulder a bigger financing burden in crisis-hit Europe. Member states have already asked the EIB to increase its annual lending programme by €15bn ($19.2bn, £13.3bn) to €63bn for this year and next in an effort to revive the economy.

So Why The Criticism?

So why, if there behind the scenes so many preparations are now being made did I start this post by saying that more than narrow mindedness, what I felt we were faced with is innocence and an inability to react? Well basically, because I think that Europe's leaders are still in general denial on the scope of this problem. We are not talking simply of little cases, like Greece and Ireland, we are talking about potentially much harder chestnuts to crack, like Spain, and Italy, the UK, and even Germany itself. Remember Germany's economic is now contracting at an almost astonishing pace, and German bonds are getting harder to sell all the time.



The full extent of the problems in the German banking system, as defaults mount in Spain and Eastern Europe, is yet to be measured. Only today German Chancellor Angela Merkel’s Cabinet approved a draft bill allowing the state to seize control of property lender Hypo Real Estate Holding AG, paving the way for the first German bank nationalization since the 1930s. And the volume of assets thought to be likely to need to be bought by any bad bank (or banks) created is very large. Hypo's loans alone are thought to total almost 260 billion euros, and numbers in the 400 to 600 billion euro range are being mentioned. So the fear here is not that a German sovereign default is looming, but that German debt may no longer maintain "benchmark" status, and thus the rate of interest the German government may have to pay to maintain its debt may rise, again impeding efforts to help maintain the economy afloat, and almost inevitably biting into the country's already strained health and pension systems.

Finance Minister Peer Steinbrueck was quoted by the Frankfurt Allgemeine Sonntagszeitung weekly newspaper as saying he could "not imagine (the establishment of a "bad bank") economically or above all politically". A bad bank would need to be financed with 150 billion to 200 billion euros of taxpayer funds, he said. "How am I supposed to present that to parliament? People would say we are crazy." Steinbrueck said no one could predict whether the rescue fund would need to be expanded given mounting losses at banks, but noted it still had room to distribute more money.

And one last example for today, of how the one half (the Commission) doesn't know what the other half (the Nation State leaders) is up to. Joaquin Almunia (who is so often "really out to lunch" on economic issues, he is, as they say "challenged" by the complexity of macro economics, see for example this post here) has warned that Brussels could take action soon against EU member states which let their budget deficits rise above the 3% threshold (see P O'Neill post here).

The EU's executive arm plans Wednesday to examine the budgetary circumstances of several countries, including France, Germany, Greece, Ireland, Malta, the Netherlands and Spain, to see whether action is needed. Most of them, notably France, Greece and Spain, have already forecast that their deficits will blow out beyond three percent of gross domestic product (GDP) -- the limit set out in the EU's Stability and Growth Pact.

France, which has called for the EU limit to be eased as governments grapple with the worst economic downturn in decades, has said it expects its deficit to be 3.2 percent GDP in 2008 and 4.4 percent in 2009. Ireland's deficit is expected to blow out to 5.5 percent in 2008, and then 6.5 percent in 2009, with Dublin hoping to bring things back into line in 2011. Spanish authorities expect a deficit of 5.8 percent this year. Germany, Europe's biggest economy, has forecast three percent this year but believes the figure could grow to more than four percent in 2010. Greece, for its part, foresees a deficit of 3.7 percent in 2009. The Netherlands is due to publish its latest figures Tuesday and might just scrape through.

Given the difficult, and unforseen, pressure we are all up against, this is, quite frankly ridiculous. Not that rising fiscal deficits, and rising debt to GDP ratios, are something we should be casual about, but I think what we need is a certain loosening of the rules in the short term, to be followed by a much stricter tightening as we move forward. And do you know the mechanism I would use to discipline the reluctant states when it comes to paying off the accounts run up during the emergency? Why yes, you've got it, the availability of those much-easier-to-finance EU backed bonds.

You see while the first argument in favour of EU bonds may be an entirely pragmatic one, namely that it doesn't make sense for subsidiary components of EU Inc. to be paying more to borrow their money when the credit guarantee of the parent entity can get it for them far cheaper, the longer term argument in favour is that it may well enable the EU Commission to become something it has long dreamed of becoming - an internal credit rating agency for EU national debt. Basically in the mid term the EU bonds system can only work if it is backed by a very strong Lisbon type reform pact for those countries who apply to make use of the facility. This is what now needs to be worked on. And how do we know that that there won't be yet another round of backsliding on all this? Well we don't, this is the risk we just have to take, but sometimes you do need to simply cross your fingers and jump, since the burning building behind you looks none to attractive either, but what we do know is that since there will now be a mechanism whereby the bad behaviour of the few really can penalise the many financially, then there really will be some meaningful incentive to generate a pact, this time, that really has teeth to stop that penalisation taking place.