Eurozone crisis: North versus South

Abandoned construction in Ciudad Valdeluz, Spain, 9 Jul 12 Image copyright Getty Images
Image caption Abandoned construction in Ciudad Valdeluz: Spain was burdened with failed housing projects after the property boom

Spain's Prime Minister Mariano Rajoy has today announced further austerity measures. Pledges only recently made have been broken. VAT is going up, from 18% to 21%.

The aim is to save 65bn euros (£51bn; $80bn) over two-and-a-half years. The measures will test further the patience of the Spanish people.

They will have watched how begrudgingly other eurozone nations agreed to a first tranche of bailout money for the Spanish banks. They had been told, when the bank bailout was first announced, that there would be no "men in black", no troika imposing a tough reform programme on them.

It is certainly the case that Spain is not in the same position as Greece, but the troika of the EU, IMF and European Central Bank will be overseeing their banking sector.

The Finnish Prime Minister, Jyrki Katainen, put it plainly: the eurozone's crisis had created a lack of trust between the northern countries and southern European countries. The Italian Prime Minister, Mario Monti, raged against some of those northern countries after they tried to unpick elements of a deal struck at a summit last month.

The tension between countries like Finland, the Netherlands and Germany on the one hand and countries like Spain, Italy and Greece on the other is tangible. It stands in the way of a short-term answer to the crisis and hangs dangerously over the future.

Culture clash

In the so-called "Club Med" countries Germany is seen as the author of austerity, helping drive youth unemployment in Italy, Spain and Greece to unprecedented levels. Germany wants to go much further. It seeks to change the economic culture of the South. In exchange for helping these weaker countries it wants to embed its economic model with the rest of the eurozone. Its instrument is the pact that enforces discipline over budgets. For the "Club Med" it means years of fiscal austerity.

The South's most potent weapon is to threaten that they cannot continue paying high borrowing costs.

Spain and Italy together are too big to be rescued. So at the recent summit they muscled Germany and other northern countries to accept that the eurozone's main rescue fund could help directly troubled banks without going via national governments and so increasing their debts. They also won a concession that the rescue fund could be used to buy government bonds without well-behaved countries having to accept new austerity conditions.

Within days of the meeting having ended it was apparent there were differences of interpretation. The Germans said that Spanish banks could not be helped directly until after the first elements of a banking union were in place. That could take months, or even longer. Finland said that it could not join in helping Spain without getting Madrid to providing collateral.

The South wants solidarity; the North does not want to accept further liability for the debts of nations they mistrust. What holds these countries together is fear; fear of the zone disintegrating and the unknown.

The President of the German Bundesbank, Jens Weidmann, warned that the bloc was "constantly mutualising risks and weakening the agreed rules". There is growing resistance in Germany to taking on more liability for the southern countries and some politicians have turned to the Constitutional Court to judge whether the ESM, the planned permanent bailout fund, violates German law.

What lies behind much of this is culture. There are vast differences between the North and the South. Even today, after two years of crisis, the Spanish prime minister is struggling to clean up Spain's public finances. It is still proving difficult to collect taxes.

Plagued by corruption

Italy under Mario Monti has embraced labour reforms. The IMF says they go in the right direction but more needs to be done. Only this week it was reported that Mafia groups earned more than 16bn euros from environmental crimes. Despite heroic resistance to the Mafia it remains a potent force. Change has not been embraced by the political class.

In his book, Good Italy Bad Italy, Bill Emmott describes how Italian politicians are still paid salaries three times those of their French counterparts and they grant themselves an array of perks including subsidised air travel.

France too grapples with its culture. Politically it struggles to address its fundamental problem: the state spends too much on social programmes. Meanwhile in the past 10 years it has witnessed a 25% decline in competitiveness vis-a-vis Germany.

More and more pressure is being put on the AAA-rated countries of the North to help the South, but in exchange they want southern Europe to re-engineer their economies - a painful process that challenges not just budgets but culture.