Is Spain the Next Greece?

The tumbling Euro zone’s fourth-largest economy, Spain, has a towering unemployment rate of 19%, a deflating housing bubble and a budget deficit that is approaching 12% of its gross domestic product. We all know that Greece has sparked fear into the minds of countless global investors, as bond and equity markets get rattled on any news of Greek debt default. However, it could now be Spain that adds fuel to the fire in Europe.

According to the WSJ article by Stephen Fidler, the main problem for weak Euro-zone countries is that as a result of their involvement in the Euro they lack the ability to manipulate their currency or artificially set interest rates. In other words, Spain cannot devalue their currency to make exports more attractive and its “sunny beach resorts cheaper.” Since 1999, these monetary policy decisions have been made at the European Central Bank in Germany, making any thoughts of a global currency absolutely preposterous.

Of course, Spain could attempt to stimulate growth via fiscal measures, such as cutting taxes or increasing spending, yet stimulus spending has already been enormous. Just like our leaders did at the outset of the financial crisis, Spain’s economy minister said in an interview, “The fundamentals of our economy are solid.”

If they turn out to be anything but, it would be far costlier for Germany and France to provide a backstop, as they have pledged to do for Greece already. It’s clear that Spain has many options, yet this process can take a long time to unravel.