Support for Spain’s banks will work (and why that’s good for the UK)

Spain, distracting attention from Greece, is to receive up to €100bn in banking sector rescue loans. The UK will rightly not contribute to this bank bail out but it is in our national interest that it succeeds first time.

These loans represents two things, both of which I believe are good news for Europe, still in the midst of a long recession and currency crisis.

The first is the speed at which the EFSF, or European Financial Stability Facility, along with European finance ministers have reacted. I take it as very heartening that this loan has been arranged at all, and look to it as a good sign that the upcoming replacement for the EFSF, the more permanent European Stability Mechanism, will function well.

The second signal the Spanish banking sector loans send is, I think, more important – a move away from austerity. This is because the money that will be lent to Spain is not comparable to the bail-outs received by Portugal, Ireland and Greece, as public sector cuts are not part of the deal.

Spain’s Economy Minister Luis de Guindos, who announced Spain’s need for the loans, partly explained why to the press, saying: “Since the funds will be asked for to attend to the financial sector’s needs, it has been agreed with the Eurogroup that it will be specifically for the financial system only.” I say partly, because in many ways the lack of attached austerity signals a change in Europe’s political outlook. Hollande’s election in France, which I have written about before, is a move away from the conservative orthodoxy. His basic argument, that the European Union does not require so large a stick when helping its struggling members, is clearly rubbing off in high places. There will of course be attached a “clean up” of the Spanish banks, but overall the money for Spain will come with no austerity, a move away from the previous norm.

Of course, technical questions remain, as do market doubts over the Spanish banking system. For one, audits of Spanish banks continue, which will decide the final sum. For another, whilst recently contributing to the chorus of those calling for loans to Spain, the IMF made a critical point: “stress tests show that while the core of the system appears resilient, vulnerabilities remain.” No doubt many will continue to hold that opinion until some time after the loans have been received.

Most importantly, whatever the sum of the loans to Spanish banks, we cannot see a repeat of the British example, in which banks receive public funds only to hold back – through fear or caution – on lending money. In other words, it is not just cash, but also how Spanish banks receive any funds that will be critical to the main task, reassuring depositors and investors alike that Spain’s banking system is once again safe.

Finally, we must be sure that attention is not distracted too far from Greece by this Spanish banking sector loan. Elections in Greece, on June 17th, will decide much, and come at a critical time. Dependent on who – if anyone – takes power in Athens are a great many aspects of the Eurozone crisis, not least the general confidence in Europe itself, confidence upon which the health of Spain’s banks ultimately rest.

All in all, it would be easy to conflate the Spanish crisis with a general Eurozone malaise – but that is too simple. For example before the crisis Spain was well within the Eurozone’s fiscal rules. Even now its government debt, at around 70% of GDP, is lower than Germany’s. As in Ireland, the origins of Spain’s debt problems are private not public. A debt binge by Spanish firms fuelled a property bubble and left the country owing foreign interests almost 1 trillion euros. Spain’s banks which were the conduit for this private borrowing binge must be cleaned up not just in their interests but in ours too. This can and will work.

For now, I welcome this move to aide Spain. A healthy Spanish banking sector can only be to everyone’s advantage, including Britain’s given that 40% of our trade is with the Eurozone and 50% with the rest of the EU.

While the UK will not contribute, our exposure to Spanish banks and the fact that the majority of Europe’s financial transactions go through the City of London, make it vital that Spain’s banks do not fail.

Claude Moraes is a Labour MEP for London