Spain has entered the dreaded ouzo zone of Greece. By cutting spending, it is inadvertently reducing tax revenue resulting in higher budget deficits and a deeper economic depression.
Finance ministers arguing about whether Spain needs a bailout is like doctors arguing if a brain dead patient needs another surgery. In both cases, the remedy will do nothing to help a situation that has reached a point of no return.
One problem with a Spanish bailout under the ECB’s OMT plan is that it will come with more austerity conditions attached to be monitored by the men in black suits. As we have seen in Portugal, Greece and Spain, austerity leads to deepening economic depression. The cure is worse than the disease.
What the finance ministers should be discussing is way for the periphery to revert to their old national currencies to break the deflationary debt trap with a good old-fashioned devaluation.
This action coupled with reforms to make the economies of the periphery more competitive will create long-term economic growth and end the ongoing depressions in these countries.