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NEW YORK (Reuters) - Europe's plan to lend money to Spain to heal some ofits banks may not work because the government and the country'slenders will in effect be propping each other up, NobelPrize-winning economist Joseph Stiglitz said. "The system ... is the Spanish government bails out Spanish banks,and Spanish banks bail out the Spanish government," Stiglitz saidin an interview. The plan to lend Spain up to 100 billion euros ($125 billion),agreed on Saturday by euro zone finance ministers, was bigger thanmost estimates of the needs of Spanish banks that have been hit bythe bursting of a real estate bubble, recession and massunemployment. If requested in full by Madrid, the bailout would add another 10percent to Spain's debt-to-gross domestic product ratio, which wasalready expected to hit nearly 80 percent at the end of 2012, upfrom 68.5 at the end of 2011. That could make it harder and moreexpensive for the government to sell bonds to internationalinvestors. With Spanish banks, including the Bank of Spain, the main buyers ofnew Spanish debt in 2011 - according to a report by the Spanishcentral bank - the risk is that the government may have to ask forhelp from the same institutions that it is now planning to help. "It's voodoo economics," Stiglitz said in an interview on Friday,before the weekend deal to help Spain and its banks was sealed. "Itis not going to work and it's not working." Instead, Europe should speed up discussion of a common bankingsystem, he said. "There is no way in which when an economy goesinto a downturn it will be able to sustain policies that willrestore growth without a form of European system." Stiglitz, a former economic advisor to U.S. President Bill Clinton,is a long-standing critic of austerity packages. He also wrote bookattacking the International Monetary Fund for policies it hasimposed on developing countries as a precondition for emergencyloans. What the European Union has done so far has been minimal and wrongin its policy direction because austerity measures to restore riskhave the effect of reducing growth and increasing debt, he said. "Having firewalls when you're pouring kerosene on the fire is notgoing to work. You have to actually face the underlying problem,and that is, you're going to have to promote growth," Stiglitzsaid. Instead, sweeping reforms to make Europe more of a fiscal union areneeded to solve the debt crisis, reinforce the single currency andultimately help Germany which, as the richest country in the union,will have to bear the highest cost of guaranteeing any commonlyissued debt and providing more resources to boost public spending. "Germany keeps saying that the strengthening is fiscal discipline,but that is a totally wrong diagnosis," Stiglitz said. Germany is expected to propose at the end of June a road map towarda European fiscal union, but Berlin favors joint euro bonds, backedby all the area's governments, only as a medium-term goal, onceother countries have fixed their high debts and budget deficitsthrough austerity measures so they are not reliant on Berlin's deeppockets. "Eurobonds is just one institutional arrangement that could work,there are others: a common treasury," said Stiglitz adding thatultimately "there has to be a way of raising revenue across Europe,to support the weaker countries in case of an economic downturn." While the economies of Spain, Greece, Italy and Portugal arecontracting, Germany grew 0.5 percent in the first quarter. Thedivide in the euro area in many cases reflects austerity programsto tackle debt and deficit problems. Critics have said the focus on cutting costs is aggravatingEurope's crisis and jeopardizing the future of the single currency.Greek elections next week could bring to power parties opposed tothe tough conditions attached to the country's EU and IMF-ledrescue plan and raise the possibility of Greece leaving the eurozone. "Germany is going to have to face the question, do they want to paythe price that would follow from the dissolution of the euro, or dothey want to pay the price of keeping the euro alive?" Stiglitzsaid. "I think the price they will pay if the euro falls apart willbe greater than the price they will pay for preserving the euro. Ihope they will come to realize that, but they may not." Stiglitz's latest book, "The Price of Inequality: How Today'sDivided Society Endangers Our Future," is scheduled to be publishedon Monday. It challenges the idea that inequality is an unavoidableevil needed to sustain economic expansion. "We could have more growth and less inequality," Stiglitz said, "sowe could do better in both dimensions simultaneously." (Reporting By Tiziana Barghini, Editing by William Schomberg andStacey Joyce). We are high quality suppliers, our products such as Amino Silicone Manufacturer , China Cationic Softener Flakes for oversee buyer. To know more, please visits Softener Flakes.
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