The long march of Europe's fringe towards greater austerity continues. This week the focus has shifted to Spain, with its Economy minister yesterday defending the additional €10bn cuts in its health and education programmes agreed on Monday, on top of the €27bn in cuts and tax increases announced last month. Luis de Guindos justified these on domestic grounds – essential for a sustainable healthcare system, rather than the need to bolster international confidence. He ruled out Spain needing an EU bailout.
We will see. The financial markets are not yet regarding a Spanish bailout as inevitable but fears for both Spain and Italy have returned. The gap between the interest rates on both Spanish and Italian debt and the equivalent German debt has shot up, though it is not yet back to the crisis levels of last November. Ten-year yields on Spanish bonds were yesterday just below 6 per cent, still well clear of the 7 per cent level that has generally triggered need for a rescue. But governments always deny the need for a bailout until they are forced into a corner. Already people are talking of Greece needing yet another support package, the third, only a few weeks after bailout number two was agreed.
That leads into the debate as to whether it is actually possible to impose such austerity on sovereign democratic nations, and if not, what the consequences might be. At one end of the spectrum, some maintain that what might be dubbed "northern European austerity" is the best way out, and others believe that several southern European countries, including Spain, need a devaluation. That devaluation would, of course, mean leaving the eurozone.
What is beyond dispute, though, is that one way or another austerity will be forced on to the whole of southern Europe for several years to come. That in turn raises the issue of the consequences for this country. We cannot affect the future of the eurozone; we can seek to protect the interests of our people – indeed our Government has an obligation to do so.
Spain is particularly important because the UK has roughly a million people living there. Now you may say that if people choose to emigrate they must take their chances: if the situation in their new homeland deteriorates, that is their problem. The reality is otherwise. For every Briton living in Spain there will be several more family members in the UK and those people vote. And if things get really bad, then many may seek to return to the UK anyway.
To make these points is not to scaremonger; it is possible that people will react to austerity across southern Europe with sullen depression more than serious civic unrest. But we are kidding ourselves if we think it won't affect us.
So what can we do? Actually we are doing two things already. One is contingency planning: and thanks to not being in the single currency, the Government has more freedom to make plans for disruption than members of the eurozone have. There has been some sketchy thought about this: as one official told me, how do we get emergency funds to people in Spain if the cash machines fail?
The other is how we choreograph a rebalancing of our trading relationships. People tend to see this in politicised terms: should we have a trading agreement with Europe rather than EU membership? One effect of the problems of Europe's southern fringe is to tilt trade away from Europe, irrespective of the politics. Exports to Europe are stagnant not because of any policy but because much of Europe does not have the money to buy our stuff. We buy a lot from Spain but we don't sell nearly so much – and I am afraid in the months ahead we will sell even less than we do now.
Nothing to write home about, but your holiday money is going further
If you were abroad over Easter and noticed the exchange rate, you may have been surprised to see that sterling is not as weak as it has been of late. The pound yesterday was at its highest since mid-February 2011. The rise has been particularly against the euro but even against the dollar it is back to $1.58, way better than the $1.38 it touched in 2009.
So what does this say about the British economy? Two things: one negative, one positive. The negative is that the global outlook has deteriorated somewhat. There is a bit of a safe-haven status about the pound but that is a function of concerns about other currencies. The pound is not winning any beauty parades; it is merely less unattractive than some other contenders. The positive is there are little bits of information about that are slightly encouraging. These include stats from the Recruitment and Employment Confederation and KPMG suggesting full-time employment rose in March, while part-time employment declined, suggesting rising confidence in businesses. There were also OECD lead indicators suggesting growth in the first quarter. That made the suggestion that Britain was back in recession seem a bit odd. And there have been decent expectations of growth from UK service industries. While none of this is at all conclusive, at least a slightly strong pound would uplift our spirits when we go abroad.