08/06/2012 Newsnight

Tonight, Spain is reported to be on the verge of formally seeking a

multibillion euro bail out. The details are muark year, but the

consequences are grave. Will it be enough to end the problems in the

eurozone's fourth-biggest economy, where does it leave the EU, and is

it just a start of a new phase of the mess. We will hear live from

Madrid and Athens. While the US and UN try to figure out way forward

for Syria, a BBC correspondent travels to the scene of the latest

massacre. I have seen appalling things, there are bits of people's

brain lying on the floor. In the corner there is a mass of congealed

blood. The from the world economy, to war and peace, we will ask if

the failure of leadership lies with our institutions, our economic

model, or maybe even our ideas of democracy.

Good evening, the eurozone's fourth-biggest economy stands on

the brink tonight of asking for bail out of its banks. It was

reported today on a conference call of eurozone finance ministers,

tomorrow Spain will formally ask for financial help. The problems

for the Spanish banks and Government are profound, and could

lead to problems for the whole world. We will hear the view from

Madrid and Athens in a empt mo, and consider whether the failures of --

in a moment, and consider whether the failures are a wider problem of

financial institutions. What is going on, it is counter

rumour and rumour today? It is more than rumour. The Reuters news

agency at noon reported, this is a quadrupled-sourced report, a

Spanish request for an aid package, the announcement expected Saturday

afternoon, the Government of Spain has realised the serious of the

problem it is said by a senior German official. This is followed

by denials by Spanish ministers, they don't need a bail out and they

are not asking for one. More or less the whole of the pro-

Government Spanish press accuseded the news agency of spreading false

information. But I think my best guess is come 1.30 tomorrow

afternoon there will be a conference call and Spain will ask

for a bail out. The size of it we don't know, we know the IMF will

publish a report on Monday that they need at least 40 billion. That

is probably a severe under estimation. What will be

significant for the rest of us in this bail out? It is about how much

Germany it prepared to move. Most people in the international

community believe Germany is about to move, make concessions, not just

to Spain, but ultimately in the next nine days, to Greece as well.

But the form it takes has to looks a minor and meagre as possible. It

is about what conditions German tax-payers' money moves to the

south to underpin the rescue of these southern economies, as I have

# Down down # Deeper and down

With Spain's economy plummeting confidence collapsing, what they

are waiting for in Brussels is a request, in Washington they are

getting tired of waiting. These decisions are fundamentally in the

hands of Europe's leaders, fortunately they understand the

seriousness of the situation, and the urgent need to act.

Here is why it is urgent, the ratings agency, FITCH, just slashed

Spain's credit rating, citing policy mistakes at European level,

predicting it will take up to 100 million euros to save them, pushing

the country's debt to 90% of GDP, and they don't just need a bank

bail out. For the banks alone we are looking to 250 billion euros,

that is quadruple what the IMF is saying. On top of that you need to

plug the gap on the public and external debt positions, that will

be a few hundred billion more euros. The money exists to bail out Spain,

but up to now, to get that kind of money, you have to cut spending,

raise taxes, and Spain is already looking fra,, and -- fractious, and

while Europe is haggling over, that the there is fears of a pan

Mediterranean Northern Rock. People are worried their country is

leaving the eurozone and their savings will be devalued away. The

only way poor countries could stand behind a bank guarantee and say

your deposits are worth the same in the new currency as in euros, is

you have a Central Bank willing to print unlimited funding.

temperature is rising because of the upcoming Greek election, a left

victory there could spark a eurok sit crisis.

-- exit crisis. That has put Germany's Angela Merkel under

intense private pressure to lay off southern Europe to relent on the

austerity conditions. Today, President Obama, dispensed with

private diplomacy. If you are engaging in too much austerity too

quickly and that unemployment rate goes up to 20-25%, then that

actually makes it harder to then pay off your debts. And the markets,

by the way, respond in this when they see the downward spiral

happening, they are making a calculation, if you are not growing

at all, if you are contracting, you may end up having more trouble to

pay us off, we will charge you even more. All permanent solutions

involve German tax-payers putting their euros, either at risk, or

effectively on a conveyor-belt to southern European Governments in

large amounts. They are saying, you are asking us to put our own

solvency on the line, to underwrite southern Europeans who we don't

completely trust, and with good reason. We have seen how they have

backsliden on various agreements. The German response is not, no

never, it is, we will do it if, in response, we get a political union

in Europe, in which we are guaranteeed that say the Spanish

and Greeks, there is a central control over how they spend. It is

logical for the Germans to hold out for a long-term solution. But the

longer they do, the greater the chances are that Europe hits some

short-term systemic crisis. For a crisis like that you need a

Government, a Central Bank, and a tight group of politicians, who can

make the rules up as they go along. All of which Europe just doesn't

have. And those who get to hear the inner

most fears of global leaders know the danger is rising.

I heard a senior American make exactly that point just over the

weekend. There was an American policy maker who said he speaks to

the Germans all the time, and they say that they understand it looks

like too little too late, but they will do just enough to avoid

catastrophe. The American response was, that is how you get a

catastrophy. This new phase of crisis denial,

and microfoam diplomacy finally pushes Europe to a solution, we

can't go on with the status quo. In Madrid we have Schwartz swart

Schwartz, a free market economist and former -- Pedro Schwartz, a

free market economist, and joined by our guest in Athens. Professor

Schwartz, how do you think any bail out to Spain might work? Well, the

intention is to bail out some of the banks, those that were savings

banks, some of them should have been shut down totally. But they

are being kept alive, and so, those banks need money. The IMF has

spoken of 40 billion. A large sum, I must say. I think that it is

right that with 40 billion, and closing some banks, if possible,

the banking sector in Spain would be saved, because we have something

like seven large banks, the ones known around the world, Santander

and others, that are solid and can get out of the difficult them thems.

The problem is, how to get that money, because the Spanish

Government doesn't want to looks a if it is being bailed out itself.

So the money will have to go to some interimmediate institution,

and that could be what is called a frog, a bank money a keeps banks

afloat and coming from the rest of Europe. Is Spain really any

different from Greece, Ireland or Portugal, in other words, why

should you get any softer conditions than any of these other

countries if you want the money? The plan that is being set in train

by the Government, could perhaps be taken a bit further down. Some of

the awen tos me in Spain are doing pre-- autonomies in Spain are doing

that. To say we want -- the right recipe is to abide by the rules,

the Greeks, perhaps, cannot do it, but the Spanish can, and are doing

it. They are abiding by the rules, we are abiding by the rules. And I

think if you look at our foreign accounts, the deficit of the

balance of payments has been reduced and soon there are will be

a positive balance of payments for pain. I think that keeping to --

Spain, I think that keeping to the same lines is the right thing to do,

and not to organise a super-Europe, with a super-politician in Brussels,

whom many of us don't trust. With the Greek elections little over a

week away, how do you think this will be seen in Greece,

particularly if the conditions on which Spain gets money are

different, perhaps softer than the austerity which you have gone

through? Can I first just say that the Spanish, are indeed abiding by

the rules. This means they have 25% unemployment overall, and 50% youth

unemployment, the rules are not working in Europe, austerity has

failed. The crisis has the same fundamental cause to it. Spain is

not different to any other country in the periphery. The way it will

play in Greece will be mixed. A lot of Greeks will be hoping that some

how this will mean that austerity will be lessened. That this will

lead to a softening of German attitudes across the eurozone. My

own view is this is misguided, I don't think this will happen. This

is wishful thinking. It is more like had hely that if Spain does

ask for -- likely that if Spain does ask for a bail out and it is

brought to pass, this will lead to an unravelling of the eurozone in a

big way. Do you think Germany is reaching a point where they are

thinking, Spain is savable, but let's cut Greece adrift, it is time

for you to be out of the eurozone? I think the situation has been

allowed to fester for so long, that things that would have happened two

years ago and possibly rescued Spain, or stablised the situation

as a whole, are now not possible. If Germany thinks cutting off

Greece and saving the rest they haven't thought it through. The rot

is going on too long. What is necessary to rescue the eurozone is

massive restructuring of the whole thing, it is not just letting the

Greeks go, it is a Marshall Plan, a bank reorganisation across Europe,

it is debt forgiveness, we are talking big things if the eurozone

will be resolved. Let's go back to Madrid. I'm glad to see there is no

power cuts in Madrid, we can now see you clearly? I'm very sorry,

I'm in my house. That is good news for the economy, at least. Do you

detect any significant change from Berlin, in the way that they are

approaching this, because that is the big signal that everyone,

particularly the Americans, as we know, are looking for? Apart from

the Americans, that is the President Obama, who believes in a

certain kind of economics. Here we need from the Germans help for some

banks, as I said, that is not as much money as people have said. The

Spanish Government, I think, can go on with cuts and at the end of the

year, can show that it is getting on the right way. I don't think

that recreating a Europe that intervenes everywhere, and having a

European minister of finance, in Brussels, whom many of us will not

trust, is the right way. The rot in Greece was started with the Greeks,

not with the union. It is the Greeks and the Spanish who changed

the way ...I Want to hear another word from Costas Lapavitsas? I find

it incredible that two years in to the crisis, it is the tired old

mantra, it is the fault of the Greeks. It is the structure of the

eurozone itself. We are going to have to leave it

there. We have run out of time. Thank you very much.

In Syria there was renewed fighting today in the capital, Damascus, an

apparent shelling of the city of Homs by Government forces. The grim

pictures and stories emerges have so far failed to prod the rest of

the world into anything resembling a solution, despite the next round

of diplomacy in New York. UN observers risked their lives to

enter the village of the latest massacre, Qubair. How significant a

moment was it that they were risking their lives and managed to

get there? In one sense, you could say they got there too late.

Because of the obstruction that took place yesterday, you see a

room covered with blood stains, is this a room in which a family was

massacred, or was it a room in which people were brought to

treatment by those trying to help those who survived what happened.

It is very hard to tell. The key point is they did get there. This

UN mission, however ineffective it may be, or seem to be, remains a

slither of hope, if you like, that there is some sort of diplomatic

platform around which the key countries with an interest in Syria

could still rally the Russians and the Chinese, afterall, agreed to

the mission going in. They are the leaders of the awkward squad in

this particular equation. That is a key point, the mission itself have

said it was critical they weren't allowed in yesterday, they want to

maintain their access. It could be one of the few breaks on the

gradual deterioration of the situation that they do. Gradual

deterioration, even from this distance, it seems obvious, that on

the ground, things are just getting worse? The pattern of the conflict

is shifting, I think. We are seeing certain evidence of escalation,

clearly these shabiha, these militia groups seem to be operating

in a more semi-autonomous way, there is a communal at this timeor

at that time building up between certain families and clans and

neighbouring villages, on a pattern that might have been seen in will

he be I don't know on the civil war and the Bosnian war in the 1990s.

There is some evidence of more advanced weaponry getting through

to the opposition, Syrian armoured vehicles, a lot of videos appearing

of armoured vehicles being destroyed. Sometimes by seemingly

advanced anti-tank weapons. All of that could mean the regime sub

contracts the war more and more to militia groups, more like a Libyan

pattern, armed men in pick-up trucks. All of that is a bad sign.

Are there still serious diplomatic options here? There do seem to be

some. There is still some scope, the UK and France clearly very

disappointed with what's happened in recent days. They seem to be

pinning their hopes still on trying to pressure the Syrian regime

through coalitions of the willing. The EU, the Arab League, have gone

further than the UN Security Council because they are not bound

by the same dynamics, they might explore further in that direction.

Mr Annan seems to be pushing the Contact Group, regional powers,

including Turkey and Iran, the Americans and British don't like it.

He is still thinking about it, as became apparent today in this

stream of consciousness. All these questions are now being discussed,

and we are also exploring how we can work with other Governments in

the region and around the world to achieve our goals. One thing which

Syria, the eurozone crisis, and a global economic slowdown have in

common, is a desire for leadership. Is the apparent lack of leadership,

inadequate institutions, flaws in the United Nations, and the EU, is

it inadequate politicians always chasing the next election, or a

design flaw in the way democracy works. Our guests are with me now.

Timothy Garton Ash is a passionate advocate of the ideals in the EU,

and Gisela Stuart is a former minister, fallen out of love with

the EU project. Tom, in terms of the institutions,

we heard our contributor from Madrid saying people don't trust

the people in Brussels, is this a worldwide phenomenon. The big

institutions just aren't working? really can't speak from a European

perspective, but from an American point of view, what we see is a

terrible combination of really deep holes, and really weak leaders.

Deep holes and weak leaders, you know, can really give you a

dangerous crisis right now. I think that, from the American point of

view, we have a new generation in power now, in the United States. We

have gone from a generation that believed in save and invest, our

greatest generation, to a generation that believed in borrow

and spend. My generation, the baby boomer generation, we're now paying

the piper for that. It is the people's fault? With the leaders,

we elect them and say what they can and can't do. There is a timidity,

I see the exact same thing, it is a bit of a howler to watch my

President lecture your President, my President who rejected his own

deficit commission. We're always good at spending other people's

money. I wondered if you thought, specifically on the EU, you are

obviously in favour of the project, do you think it has been totally

oversold bit political elite, it is just not living up to what people

said it would do? It is important to say the three biggest economies

and political countries in the world, namely, the United States,

China and the EU, are all in major crises of their political economy.

Tom described the American crisis, and Chinas a democratic crisis. In

Europe we have European Monetary Union and policies, our politics

are still national. These are democratic national politics, and

the biggest problem s the real question is, can you find a deal

that will be acceptable both to the Spanish voters and to the German

voters? That is the European crisis. There is way of positively looking

at that, which is saying, actually, that means we still like our nation

states. Broadly we trust them more than some other international body,

that may be a good thing in terms of how we get on in Britain, or how

French people think about France, but it is pretty bad if you are

trying to run 27 countries all together? The nation state has an

extraordinarily important function, arguably, with exception of the

Balkans, most 1945, Europe had functioning nation states. What we

now have is a construction of a financial union, without a

political union. Which is trying to overcome the nation state, it is

not taking its people with it, and above all, it is incapable of

regaining competitiveness. If it was the United States of Europe,

France, Spain, all these countries, would still have their economic

problems, because you have a single currency construction, which is

simply not working. Do you think that people simply distrust

eliteings in all the countries. -- elites in all countries. We

distrust international elites and elites in our own classes, because

they are not doing what we want them to do? You could look at it

broadly about not distrusting them, but individuals are so in power now,

there is so much transparency, to be in public life, everyone

blogging, tweeting, taking pictures. To be a leader now is a lot harder,

it is extremely noisy out there. it also, is it the leaders broadly

know what they should be doing, but they are terrified of the voters.

Because in your Congress every two years they have to be re-elected.

You can't take tough decisions if you have a two-year time frame?

think our leaders now, presidential and congressional, are misreading

the public mood. The public are away head, they understand the

problem, they want to be led. Good policy here is the best politics.

Do you agree with, that that the people are ahead of the

politicians? Can I pick up on that. The hod of the euro group says they

know what they need to do, they don't know how to do it and get re-

elected. That is the challenge. The key to this moment is one person,

Angela Merkel. If Angela Merkel from the beginning of the crisis

had said, my dear compatriots, we have to save the eurozone, because

it is in our own economic and national interest, we would be in a

different place today. So I think it is the challenge of persuasion

by democratic national leaders, and the eurozone will stand or fall on

democratic national politics. talks of Europe, but she thinks of

Germany, that is hardly surprising, that is what leaders do? It is

shocking that we said the politicians know what the right

answers are, but they can't do it because they can't take the nation

with them. The question is I as a politician take money out of your

pockets in taxes and do things, and that is what you elect me to do.

So-to-think that Germany could continuously rescue Spain and

Portugal, Angela Merkel knows, she knows that they have poured

millions into East Germany and it hasn't made them competitive.

don't disagree, because if she doesn't persuade the German people,

then the thing will go down. Actually the Irish have just voted,

in a referendum for a Fiscal Compact, let's agree you need to

ask the people. Ireland is still in recession, they have not resolved

the problem. Unlike places like Iceland, it has not been able to

devalue. Ireland hasn't been solved. Do you want to tell the Irish to

vote again, because they gave the wrong answer, they said yes?

need to allow countries to leave the euro, because the current

construct will not survive. We can either delay the day of reckoning,

or we can draw the logical conclusion and say this construct

doesn't work. I'm all in favour, if they vote for it. Do you see, while

you said the people may be ahead of the politicians, maybe not

everywhere. But to take Greece, for example, the fate of much of Europe,

and perhaps the world economy, depends on a very few voters in a

very small country, lovely though it may be, that seems rather odd,

does it not, that they decide how the eurozone should continue, which

affects all of us? It certainly seems odd to me. I agree with what

was said about competitiveness. Ultimately, can you make stuff that

other people want to buy? Can you have a currency and an economy that

is aligned with that? What worries me when I look at Europe today, is

not banks that are too big to fail, I say is this problem too big to

save. I do have sympathy with Merkel. I agree with what Tim said

too. She's damned if she does and if she doesn't. She needs Europe

for a thriving German economy. But at the same time, what confidence

would you have that the Greeks really get it and can produce a

competitive economy in this construct. I really think the

crisis retina, the choice for Europe today, they are going to

have a political crisis, as they inflict the pain, or they can have

an economic crisis, or maybe both. I'm fastening my seatbelt, I tell

you. In terms of Angela Merkel, you said

it is up to her, she could have played it differently, she could

indeed have played it differently, but in all the countries we have

been talking about, the U state and Germany, constitution -- United

States and Germany, constitutions are written so Angela Merkel can't

be a really powerful Chancellor, she has so many people to look

after and bring with her, it is very difficult? It is very

interesting, as Tom knows better than anyone, the United States has

an increasingly dysfuntional political system, because it has

almost too many checks and balances and lobbies. The German political

system was designed to ensure that no Adolf Hitler would ever come to

power again T has been immense number of checks and balances, that

makes it very difficult to move. That is indeed one of Merkel's

problems. That she's not in the position of a French President, or

a British Prime Minister. Nonetheless, I think if she started

to try to persuade her compatriots, three or four years ago, that it

was in their own national interest. Let me bring in Tom there, you

could say the American constitution was to prevent another George III.

You have gridlock, and a lot of people complain about, but it is

what makes America tick? We have divided powers, but what we didn't

anticipate was this level of money in politics, this kind of media,

that fragments it, politicians are finding it difficult these days any

way to trump the other. Do you realise what we are doing, we are

having an election, you have your crisis over here, we have an

election, and we are saying in five months when we finish the election,

you keep it on hold. After our election, and one party spends a

billion dollars smeerg the other, then we will get together and solve

the problem -- smearing the other, then we will get together and solve

the problem. Good luck, we are doing things so detatched from the

reality. The voters at the moment are ahead of uss, people know -- us,

people want to know what is going on. If you have to increase taxes

and reduce public spending, people are prepared to take the pain if

the result will get you competitiveness. What we have

currently in Greece and Spain, they can cut their public spending, they

can increase the taxes, but where they will not become competitive,

that is where democracy suffers. Coming up in a minute, the review

show, matter that is in Glasgow. Tonight's review show is a book

special, we're going to be looking at the latest offerings from a

quartet of literary big names. Martin Amis tackles the state of

England, we have the retail of the life of Roger Casement, and Lionel

Shriver creates her own corner of Europe in the new Republic, all

that and music from Paul Buchanan. That is all tonight, we leave you

with the final farewell from the Bee Gee RobinGibb. This is the song