Last November, the Spanish government withdrew €4 billion from the state’s Social Security reserve fund to pay pension obligations. That followed a €3 billion withdrawal just two months before, in September 2012, to cover “unspecified” needs at the Spanish treasury. It was also disclosed that the Social Security fund had allocated over 90%, about €65 billion, into Spanish sovereign debt.

Spanish banks, for their part, had increased their allocations to Spanish gov’t bonds sixfold since 2008, owning an estimated one-third of all Spanish bonds. Now the Spanish government is planning a road show in the US to attract US dollar investors. Why the search for marginal buyers?

Given the heavy hand of debt and leverage into the public sector, the lack of Spanish recovery maybe isn’t all that surprising (either from a crowding standpoint or expectations and confidence).

In acknowledging the obvious, the ECB’s answer was to guarantee the euro’s continued existence. A large part of that promise was the open-ended guarantee to push ECB “stimulus” into the afflicted PIIGS countries. High rates and dim perceptions of PIIGS debts were, to the ECB’s collective thoughts, thwarting the recovery efforts of the near-zero interest rates, so using central bank moral suasion to talk (remember, not a euro has been spent yet) those rates down was the preferred monetary option that was supposed to both keep the euro together and get the Southern economies moving.

Current data does not seem to show any follow-through from the monetary threats into the real economy.

 

It’s not just Spain either.

Even more recently, the real economic picture shows nothing to justify bond and stock prices (outside of potential debasement).

There is a commonality here that goes beyond simple monetary practice. In countries that have not been visited by the urge to borrow heavily, economic progress is far different.

This is highly suggestive that a strong negative correlation exists between the degree of financialization and the real economy.  Of these nations, only Italy stands out. Italy qualifies as “frugal” only in that it hasn’t doubled its debt level since 2000. But rather than denoting actual fiscal care, that only speaks to how indebted Italy was at the starting point (preserving the suggested causal linkage).

On the opposite end, we find the usual suspects plus a few that might rate closer attention.

Current economic fortunes in all of these countries (with the current exception of Ireland) is far less than ideal. Outside of the UK and France, all of these countries have seen the ECB purchase their sovereign debt through the first instance of OMT (and Greece has been through two default-type events just in 2012).

It is also clear that the UK, much like Spain and Ireland, was overexposed to the banking aspect of the Great Recession. In these countries, debt is now more related to financial system malfunction than real economic fortunes.

Given the costs to the real economies of Europe and the obvious lack of promised progress, again we have to ask what exactly is the object of the ECB’s efforts. It is clear, in my opinion, that the ECB, much like the Federal Reserve, is prioritizing finance over economy. The costs, however, are more than euros and sovereign debt.

Where this ultimately leads, given the explicit linkage of monetary measures to economic devolution, is an eventual re-assessment of central bank efficacy. The ECB can buy the Spanish and Italian credit markets off, but without legitimate progress it will only exacerbate misfortune and ultimately political pressure in the “wrong” direction (the rise of Berlusconi as one example).

The European crisis is far from over, particularly now the full costs of the euro are becoming more apparent.