Spain is in the throes of the worst economic crisis in its recent history. Reeling from the collapse of a debt-driven construction boom, Spain entered recession in the second quarter of 2008 and posted six consecutive quarters of negative growth. Although the economy grew by 0.1 percent during the first quarter of 2010, Spain’s growth prospects are poor and any pick-up could be short lived.
Spanish GDP fell 3.6 percent in 2009, and a package of harsh austerity measures announced since then will undermine any economic recovery during the foreseeable future. The International Monetary Fund (IMF) says there will be no positive GDP growth in Spain until 2011, at which point it will still be below 1 percent. The Spanish Finance Ministry on May 20 said it now predicts a 0.3 percent contraction in 2010. It also cut the forecast for Spanish growth in 2011 to 1.3 percent from 1.8 percent.
Meanwhile, Spain now has the highest unemployment rate in the European Union. More than 20 percent of working-age Spaniards (or 4.6 million people) were without a job during the first quarter of 2010. That compares with an average rate of 10 percent among the 16 countries that use the euro currency. Persistently high unemployment presents an obvious threat to political stability in Spain.
As unemployment soars, Spain is also facing an exploding budget deficit. The collapse of the labor market, which has resulted in a steep drop in tax collections, and the Socialist government’s spendthrift policy response of increasing unproductive public sector stimulus spending skyrocketed the deficit to 11.4 percent of GDP in 2009 (or five times higher than in 2008).
The combination of negative GDP growth, rising unemployment, and a high deficit has raised concerns about the sustainability of Spain’s finances. Indeed, two international ratings agencies, Fitch and Standard & Poor’s, have recently lowered Spain’s long-term sovereign credit rating, citing the risk of a prolonged period of below-par economic growth and persistently high fiscal deficits.
The downgrades will make it more expensive for Spain to finance its debt, and increase concerns over Spain’s overall creditworthiness. Indeed, investors anxious that a debt crisis in Greece could create a domino effect in Spain are already demanding higher interest rates to hold Spanish debt.
Although Spain’s problems have been known for years, concerns about the Spanish economy were thrust into the international spotlight in January 2010, when noted New York University Professor Nouriel Roubini said Spain posed a major threat to the stability of the European single currency. Speaking from the World Economic Forum in Davos, Switzerland, Roubini warned: “If Greece goes under, that’s a problem for the eurozone. If Spain goes under, it’s a disaster.”
A debt crisis in Spain would make the problems in Greece look tame by comparison. At €1.3 trillion, the Spanish economy is more than four times the size of Greece’s. (While Greece represents about 2.5 percent of eurozone GDP, Spain accounts for about 11.5 percent.) Spain is also the fourth-largest economy in the 16-nation euro zone, the eighth-largest in the OECD, and the tenth-largest in the world. Many analysts believe Spain is simply too big to be bailed out, and that a Spanish default would almost certainly lead to the breakup of the euro zone.
Fearing for the future of the euro, the European Union and the IMF have put intense pressure on Spanish Prime Minister José Luis Rodríguez Zapatero to implement a series of austerity measures aimed at bringing the public deficit down to a eurozone limit of three percent of GDP. [...]
Read on to see the many reasons why that can't happen. The current government won't survive if they do what they need to, but if they don't do it...