Capital Flight may sound like the name of a new budget airline – in fact it's what happens when a country loses trust in itself. In the first three months of the year, Spaniards exported a total of e100 billion to London, Frankfurt, Paris - anywhere. The biggest flight of funds since records began. Citizens, firms and banks are hedging against the likelihood that Spain will depart the eurozone, crushed by the burden of its sovereign debts. The respected former Spanish premier Felipe Gonzales said last week that “Spain is in a situation of total emergency, the worst crisis we have ever lived through”.
Where did this come from? It was supposed to be Greece that was on the point of departure. Only last week we were all worrying about contagion from a “Grexit” spreading to other Mediterrannean countries. But the contagion seems to be happening before the disease. In fact, there's a possibility the patient may die even before it is infected, because the collapse of Spain – an economy four times the size of Greece – would be curtains for Europe, and probably for the world economy. It's not just too big to fail; it's too big to bail.
What is happening to Spain is similar to what happened to Lehman Brothers in autumn 2008, except on an epic scale. That was just a run on a Wall Street investment bank; this is a run on a trillion euro economy, the fourth largest in Europe. When entire countries go bust the reverberations are felt across the planet.. If Spain restores the peseta – and this is actually being talked about – then it would default on the huge debts owed by its private sector to international banks. They would go bust as a result, causing credit to cease overnight and international trade grind to a halt. There would be runs on nearly all European banks, not just the Spanish ones. Cash machines would close. It's as serious as that.
