By: Dr. Mike Campbell
Spain is a Eurozone member and the fifth largest economy within the EU (it is the fourth most important economy within the Eurozone which, of course, does not include the UK). Spain has the unenviable record for the highest level of unemployment within the EU at 23.3% - more than twice the average level which stands at 10.1%. The current level of the Spanish deficit is about 8.5% of GDP and Spain has already announced that it will be unable to meet the deficit reduction called for in the recent EU-wide (minus the UK, of course) fiscal stability agreement. It hopes to reduce the deficit to 5.3% of GDP this year, but this will require further unpopular austerity measures to be pushed through.
On Tuesday, the Bank of Spain announced that the country had fallen back into recession following a 0.3% contraction in the economy in Q4 2011. Projections for the full year (2012) suggest that the Spanish economy will contract by 1% which suggests that the unemployment figures are unlikely to improve this year.
There are continuing fears that Spain (or Italy) will re-ignite the European sovereign debt crisis. Spain’s debts are still broadly in line with Eurozone convergence criteria at 60.1%, but Spain’s woes stem from the bursting of a housing bubble, high unemployment (which reduces income tax and boosts social security spending) and a relatively uncompetitive (read expensive) workforce compared to her peers. Employment regulations need further reform, but obviously this is unpopular with both unions and the workers that they represent. If markets lose confidence in Spain’s ability to service her debts, yields on bonds will rise increasing the pressure on the country.