The latest piece of gruesome data from Spain makes plain, yet again, that the government's harsh schedule of spending cuts is simply not working. Terrified of losing everything as banks fail, Spaniards have been sending their money abroad at historic rates: a net sum of €66bn went abroad in April alone – and that was before Spain's Bankia group had to be rescued.
Are European Union officials finally catching on to a simple truth: that the medicine (austerity) is killing the patient (Spain, and lots of other troubled European economies)? There was a small hint today that this might be so, when a senior EU official suggested rules may be relaxed to give Spain a further year($) to align with the eurozone's deficit targets.
Relaxing the rules
Since the eurozone crisis began, the EU has insisted that members should aim to lower their budget deficits to no more 3% of economic output. To put this into context: last year's deficit in Spain was 8.9%, and unemployment is now running at 24%. Getting the deficit down to 3% would have horrific effects on ordinary people, if it's even achievable at all.
If EU leaders were to decide to relax these cast-iron fiats it would send a powerful message to all of Europe's struggling economies: that they may, finally, be able to lighten up with the cuts. The Financial Times believes that the current murmuring to do just that reflects Brussels' growing fear that tough austerity is deepening rather than solving the recession.
Sadly, the right-wing, pro-austerity government in Madrid has indicated that it would reject the offer of a relaxation or postponement – just as Spain's troubles sent the euro to a 22-month low against the dollar and trashed European stocks yesterday.
The flow of money from the country is not technically a "run", yet. But in normal times more money comes into Spain than leaves it: in just the last nine months, €193bn has fled Spain.
Let's stick together
Germany has been pushing hardest to enforce so-called "fiscal discipline" (read: slash and burn) in Europe's troubled economies. Brussels has joined in these calls until recently, but it seems its resolve may now be weakening.
In an interesting parallel development, the European Central Bank chief, Mario Draghi, and the European Commission president, José Manuel Barroso, today made more positive noises about moves towards greater fiscal union in Europe – proposing Europe-wide bank support schemes and even a "banking union".
It's a measure Germany has fiercely resisted – as the strongest economy, it would have to pick up the tab for bad banking practices all over the continent. But Germany might not get to call all the shots any more.
Further reading: A Reuters columnist explains why a banking union inevitably means a fiscal union – and why the Germans don't like that. Plus: former US Labour Secretary Robert Reich worries that Europe and the US might both be drifting into a destructive brand of fiscal austerity.