Spain's Debt Crisis Returns Without German Engine

Germany can no longer drive the European engine

Germany's response to stagflation has come in the form of austerity. The latest Federal Budget cuts almost everything except Defense, and Berlin is pushing new fiscal rules that end pandemic-era spending freedom. The analysis presents an uncomfortable diagnosis: the locomotive that pulled Southern Europe out of the pit has run out of fuel, and without cheap Russian energy, there is no miracle to repeat.

From the 2008 collapse to the de facto 2012 bailout

The starting point is well known. Spain collapsed in 2008 when the European interbank market, shaken by the global financial crisis, cut funding to the national property bubble. The State responded by issuing massive public debt abroad; by 2010, that channel also closed. In 2012, the country was on the brink of a total bailout, the same one already signed by Greece, Ireland, and Portugal.

The ECB prevented it by extending its umbrella over Spain, Italy, and France with the de facto backing of Germany and its northern partners. Berlin supported with its AAA rating an expansionary policy that was not its own, and between 2012 and 2019, it drove the Union thanks to a competitive mid-to-high-end industry and Russian backup energy. That was the trade-off: Germany provided credibility, the ECB provided liquidity, and the South provided internal devaluation.

Spain's Achilles heel: net external debt

The bill from those years did not disappear; it was recycled. Adjustment came through wages, with a cheaper labor market to compensate for lack of competitiveness. The current account balance returned to positive territory, but on a fragile base: tourism and low wages.

One figure hovers over the discussion. If the threshold of 40% net external debt to GDP is accepted as the boundary of technical bankruptcy, Spain exceeds it comfortably: more than 100%. The contrast with Japan is used to explain why Tokyo sustains 200% total debt without issue: it is held by its own banks and, above all, there is monetary sovereignty. Spain does not have it. It depends on Frankfurt.

Why Germany can no longer pull Southern Europe?

Because it lacks exactly what made it strong. The war in Ukraine has removed cheap Russian gas, and energy costs have eaten into industrial margins. The result is the worst possible scenario: stagflation, economic crisis with high inflation. German industry is in technical shutdown, without mass layoffs yet, and Berlin looks at its own inflation—not Spain's—when setting monetary policy.

Fiscal austerity has, within this framework, a coherent and cruel logic: cutting to preserve the currency and lower energy import costs. What doesn't fit is the rest. The Banking Union is incomplete, solid federal mechanisms do not exist, and if Germany cannot provide guarantees, member states will fall in a chain reaction. The locomotive has no spare parts.

Austerity returns and digital euro emerges

Homework is already written down. The European Commission has reminded member states they must respect the 3% of GDP deficit limit, and the Council has recommended Spain's National Reform Programme. The pandemic exception is over.

In parallel, the ghost of programmable money appears. Some argue that the disappearance of cash and the digital euro will serve to condition or confiscate savings and pay public debt, relying on journalistic reports about haircuts on savings as a way to close the hole. It is worth separating fact from suspicion: the monetary architecture is changing, but the ultimate intent is speculation.

Chinese cars and the end of free trade

There is a surface indicator almost nobody looks at: parking lots. Years ago, Korean cars were curiosities; today, Dacias are counted in thousands, and MGs—managed by a Chinese state-owned enterprise—and some Lynk & Cos are becoming part of the landscape. European automotive, the engine of the German engine, faces a competitor with costs it cannot match.

And underneath, energy. It is argued that global oil consumption will not decrease but increase, with the world population heading toward 10 billion and India, Indonesia, or Africa as growing demanders. If that happens, Europe's share of the pie narrows. Extending the party with renewables clashes with the fact that they also demand minerals and oil to build.

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The historical parallel used is that of the Roman Empire: currency devaluation, extremely high inflation, unsustainable urban life, and a return to the countryside. The difference is that Rome did not have a central bank that blows hot and cold at the same time. No one has set a date for the exact moment that line is crossed. And there, precisely there, the analysis gets stuck.