But more needs to be done, especially in Spain…

With the 500B euro package from the EU (60B in loans and 440B in loan guarantees) plus an additional 250B euros from the IMF (which must be pretty close to their entire lending facility!)

In addition, and even more significantly according to us, the ECB (European Central Bank) finally agreed to buying debt on the secondary markets, calming the interbank market (which was starting to freeze up as banks got wary of one another’s exposure to European Sovereign debt).

So Europe has finally gotten ahead of the curve. For now.

The near 15% rally on the Spanish stock market was especially misplaced. All Europe did was calm the markets and buy time. That time needs to be used. Spain is particularly worrisome.

The Spanish economy has:

• A budget deficit of 12%
• A very large property bust and (in relation to that) an overextended banking sector
• Unemployment of 20% (national average, one can only imagine what it must be like in some regions, like Extremadura)
• Youth unemployment almost twice as high
• A very sclerotic labour market highly favouring insiders (that is, the unionized with jobs for life)
• Significant competitiveness problems after real wages rose ahead of productivity for most of the past decade
• Public debt is still (relatively) low, but it’s rising rapidly, and “relative” has relative meaning these days..

Now, these problems need urgent answers. Instead, what the socialist government of Zapatero does is basically nothing (at least nothing concrete, there are some ‘plans’ to make budget cuts). Instead, he likes blaming speculators and rating agencies for the problems that are of their own making, and which only he can address.

This kind of inaction is intolerable, most of all for a whole generation of Spaniards who are leaving school and finding no jobs, but it puts large strains on the unprecedented European solidarity as expressed in the unprecedented measures taken on Sunday.

Politically, we acknowledge it’s not so easy for Zapatero to act. The regions have a large amount of autonomy and his party’s majority in parliament depends on support from the Catalans, which complicate making budget cuts.

But to do nothing and blame speculators for having to pay a single(!) percentage point above German interest rates (on 10 year bonds), well, that’s just sheer nonsense.

Another problem is Greece. We still think its debt will have to be restructured. They might even have to leave the euro. The sums just don’t add up. The austerity necessary will throw the economy back a generation and will have to be sustained for years and years to have any kind of impact. Things will get far worse before they might get better and even when they do, the Greek economy will be transformed into little more than a debt servicing platform.

This should be such an unappetizing prospect that alternatives should be contemplated. The markets did, hence the crisis. But now the EU package has bought time in which mechanisms can be worked out to reschedule Greece’s debt in a more orderly fashion, without this having to lead to a credit crisis mark II.

We believe preparations are already under way. The ECB buying debt means that European banks can get rid of their Greek debt, which will shield them from the impact of a restructuring. This is another reason why the ECB move (although deeply contradictory to anything they belief in) was so significant.

We were on the edge of credit crisis mark II at the end of last week, and such a crisis would be more serious by far compared to the 2008 version. The new element would be that now even the Sovereign States, not just the banks would have severe problems.

Europe bought time with unprecedented measures that threw out whole belief systems. Let them use that time wisely. Especially in Spain..