Spain: Euro Zone’s Next Problem Child

Greece this, Greece that… The spotlight has been on Greece lately and everyone seems to have forgotten the other problem child of the euro zone. Can you guess which nation I am referring to?

If you answered Spain, then give yourself a pat on the back! Spain has its own problems and the more that I think about it, the more I realize that Spain could end up like Greece. In fact, Spain is worse than Greece in some aspects. Is that even possible? Yes, apparently it is.

Take a look at Spain’s unemployment rate for instance. The most recent Spanish employment report showed that 24.4%, or roughly one out of four, of its workforce is without jobs.

If that wasn’t bad enough, the trend in the labor market also suggest that things could get even worse. During the first three months of the year, companies shed a total of 367,000 employees.

In contrast, Greece’s jobless rate is slightly less bad at 21.7%. No jobs mean no growth and less tax payments for the government.

Another issue big issue that Spain faces is the seemingly nonexistent progress it has made with regards to reducing its debt levels. It was reported a few days ago that the country is unlikely to meet its budget deficit target of 3% for 2013. Greece, on the other hand, is very close to running a primary budget surplus.

The future of Spain’s finances look very grim, especially since the Spanish people aren’t known for their frugality. They’re actually quite the opposite of frugal.

For the past ten years, Spain’s current account balance has been negative. Moreover, the country’s private debt (i.e., loans borrowed by consumers from banks or accumulated from credit cards) is almost twice that of Greece.

To fix Spain’s problems, the country needs to do two things: save and grow at the same time. But like most solutions, it is easier said than done.

You see, in order for a country to save, it must make tax hikes and spending cuts. But the problem with that method is that it only works in the short-term.

As time goes by, the tax increases and decreased spending will eventually hurt growth. This, in turn, will most likely have a negative effect on the country’s balance sheet. Spain is in the same vicious austerity-recession cycle that Greece was in before the bailouts.

In order for Spain to truly get out of the mess that it is in, it needs external help. In other words, Spain needs a bailout to survive. With additional funding, Spain will find it easier to simultaneously pay its debt obligations and continue spending on government projects to generate economic growth.

The real question now isn’t whether Spain will survive on its own or not (I don’t think it will), but rather, will it receive the bailout that it needs? I put up a poll below, so let me know what you think!

  • Semenov Vladimir

    Very informative, thank you.

    P.S: Why no word about latest bank bailout by Spain? :D