European governments are hoping that a massive new €750 billion ($1 trillion) bailout fund will contain the sovereign debt crisis that started with Greece and now threatens to destabilize the euro currency. But the rescue package, which is on top of a separate €110 billion package to rescue Greece from bankruptcy, essentially transfers the burden of debt from one European country to another and does little to prevent profligate countries from reaccumulating unsustainable debt.
Not surprisingly, speculation is rife (here, here, and here) that the new bailout plan is a short-term palliative, one that simply puts off a final day of reckoning. Indeed, many economists believe it’s only a matter of time before Europe’s debt contagion spreads across southern Europe and infects Portugal and Spain.
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. 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.
Economists are divided over the question of whether Spain is dancing on the edge of the abyss, and Spanish politicians insist that Spain is not Greece. Spanish Prime Minister José Luis Rodríguez Zapatero, for example, recently dismissed speculation that the country would need a bailout as “complete madness.”
But the one thing that everyone does agree upon is that the Spanish economy, which is grappling with the fallout from the meltdown of its housing sector, a sharp drop in domestic consumption, a spike in unemployment, and a steep drop in tax revenues, is in deep trouble, and will remain so for many years to come.
Spain is mired in its worst recession in 60 years, and the Bank of Spain projects that GDP will shrink 0.3 percent this year, after falling nearly 4 percent in 2009. Spain’s jobless rate is stuck at 20 percent, almost twice the EU average. Meanwhile, Spain’s benchmark IBEX stock index is the euro zone’s worst performer this year after Greece.
Meanwhile, Spain’s debt to GDP ratio is expected to climb from 53.2 percent last year to 64.9 percent this year and 72.5 percent next year. But investors are particularly concerned about Spain’s gaping budget deficit, which at 11.3 percent of GDP is the third-largest in the euro zone, and which may exceed that of Greece this year, according to the European Commission.