Bye Bye Euro? Maybe they can issue the "Goldman" as currency?
The Euro's Next Battleground: Spain
finance.yahoo.com
Greece set off the crisis rattling the euro zone. Spain could determine whether the 16-nation currency stands or falls.
The euro zone's No. 4 economy, Spain has an unemployment rate of 19%, a deflating housing bubble, big debts and a gaping budget deficit. Its gross domestic product contracted 3.6% in 2009 and is expected to shrink again this year, leaving Spain in its deepest and longest recession in a half-century.
At the center of the crisis are millions of Spaniards like Olga Espejo. The 41-year-old lost her administrative job at a laboratory in Madrid, then found a temporary post replacing someone on sick leave -- until that job was abolished. Her husband and her sister have also been laid off -- all among the one in nine working Spaniards who have lost jobs in the past two years.
Each gets an unemployment check of at least €1,000 a month, or about $1,350, part of a generous social safety net that Madrid says it won't cut. But Ms. Espejo's benefit runs out in July and her husband's in May.
"What prospects do any of us have now?" Ms. Espejo asks.
That question haunts Spain and the entire euro zone as the Continent faces its biggest economic crisis since the common currency launched in 1999. Worries over Greece's ability to finance its huge debts have spread to other, weaker members of the euro zone, but these same fears are now nipping at Spain's heels. The problem is that, thanks largely to its membership in the euro, Spain lacks tried-and-true means to heal its economy.
Spain can't devalue its currency to make its exports more attractive and its sunny beach resorts cheaper because the euro's value is driven by Germany's bigger, competitive industrial economy. Madrid can't slash interest rates or print money to spur borrowing and spending, because those decisions are now made in Frankfurt by the European Central Bank.
Spain could still try to stimulate growth through tax cuts and spending increases. But it has already mounted enormous stimulus spending that swelled its budget deficit to 11.4% of GDP last year, and it would need to sell more bonds to raise fresh cash. Buyers of Spanish government bonds, spooked by the prospect of a Greek default, have already demanded higher interest rates from Madrid.
"Spain is the real test case for the euro," says Desmond Lachman of the American Enterprise Institute in Washington. "If Spain is in deep trouble, it will be difficult to hold the euro together...and my own view is that Spain is in deep trouble."
The government rejects talk of crisis. "The fundamentals of our economy are solid," Elena Salgado, Spain's economy minister, said in an interview. Ms. Salgado said the country's big banks are sound, its economic statistics credible and its companies dynamic enough to maintain their share of export markets. She pointed out that Spain was running budget surpluses until the financial crisis struck, and its government debt has grown from a very low base.
Euro heavyweights Germany and France have pledged to support Greece if necessary. But any bailout for Spain -- whose $1.6 trillion economy is nearly double those of troubled euro-zone partners Greece, Portugal and Ireland combined -- would be far costlier.
A "shock and awe" infusion aimed at renewing faith in Spain's finances, should it be necessary, would take roughly $270 billion, according to an estimate by BNP Paribas. It estimates similar confidence-restoring moves in Greece, Ireland or Portugal would require $68 billion, $47 billion and $41 billion, respectively.
Some observers, to be sure, believe Spain will ride out the troubles. Emilio Ontiveros, president of AFI, a financial analysis firm in Madrid, says recovery is in sight in the second half of the year. "We've had some luck. France and Germany, our biggest markets, are beginning to grow," he said. This should be enough to stop unemployment rising much beyond 20%, a level Spain has coped with as recently as the late 1990s.
Most economists see three options for Spain.
The first is for the government to do nothing, leaving the economy to wallow through years of high unemployment and debt defaults. The second is for the government to take a more active role, slashing its spending while taking unpopular measures to boost the supply side of the economy, including overhauling a rigid labor market.
On Tuesday, Spain's top central banker strongly urged this path, calling in a speech for swift government action to reduce the budget deficit and reform the labor market.
"If the reforms come late or are insufficient, our future is undoubtedly worrying," Bank of Spain Governor Miguel Angel Fernandez Ordonez said.
Mr. Lachman of the American Enterprise Institute is among the pessimists who doubt the government will take this course. He thinks Spain's chronic inability to restart growth will lead it to contemplate a third option: splitting the euro zone asunder by withdrawing from the common currency. That would permit a devaluation that would, at a stroke, increase Spain's competitiveness and allow the economy to grow again.
A more mainstream view holds that no government, Spain's included, would dare to brave the financial chaos such a move would unleash. |
