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Are Speculators 'Attacking' Spain and Italy?

German Chancellor Angela Merkel
Michael Gottschalk | AFP | Getty Images
German Chancellor Angela Merkel

It may be hard to tell, but a subtle shift is going on behind the scenes in Europe.

Both German Chancellor Angela Merkel and French President Francois Hollande have denounced “speculators” who are “unjustly attacking” Italy and Spain.

Of course, politicians raging against speculators is nothing new. The demonization of "the Speculator" has been a running political gag for at least a century.

But in context there seems to be something else going on: the center of Europe is laying the groundwork for rescuing the periphery, without imposing the kind of harsh controls put on Greece and Ireland.

“Increases in interest rates are not justified in countries like Italy that have made serious efforts and have a budget surplus,” Hollande said. “You can’t ask people to make efforts when there are no rewards for the effort.”

In short, because the markets are not reacting to the agreed-upon austerity measures as the leaders of Europe agreed they should, something else needs to be done.

U.S. Attorney General Eric Holder speaks as during a news conference to announce Medicare Fraud Strike Force law enforcement actions October 4, 2012 at the Justice Department in Washington, DC.
U.S. Attorney General Eric Holder speaks as during a news conference to announce Medicare Fraud Strike Force law enforcement actions October 4, 2012 at the Justice Department in Washington, DC.

Spain needs tens of billions of euros to recapitalize its battered banks. It can still borrow in the market, but it is reluctant to do so at the elevated rates. Italy is arguably in better shape, but a bond auction Thursday saw higher than expected yields.

A few things to keep in mind. The rates Spain and Italy are being forced to pay are not the work of speculators. No “attack” is underway. The elevated rates are the result of investors deciding that the would rather find safer uses for their capital unless they are paid higher rates of interest to compensate for the perceived risk. That’s a rather odd sort of speculation. In fact, it’s not speculation at all.

The European Financial Stability fund was created precisely to provide funds in these situations—where markets balk at lending at the rates politicians think are appropriate. But Rome and Madrid are loathe to accept the sort of sovereignty surrender that Ireland and Greece have had to endure, to avail themselves of EU and IMF funding.

Paris seems to have sided with Rome and Madrid in the quest to change the rules once again, so that the countries can be rescued from the weight of market interest rates without have to submit to Germanized budget rules. Not surprisingly, Berlin still seems to be holding out.

Interestingly, all of this is having an effect in Greece. Alexis Tsipras, the head of the left-wing Syriza party in Greece, has made the attempt to give Spain and perhaps Italy special treatment a part of his campaign:

"If Spain can remain in the euro with a bailout but without a memorandum, then why can't Greece?" he asked at a recent rally in Athens.

You have to admit, it’s a fair question.

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