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Is Spain (not Italy) the EU’s biggest long-term concern?

April 12, 2012

Spanish PM Mariano Rajoy (Reuters)

Experts discussions have long held the idea that Greece is not the real issue when it comes to solving the Euro Debt Crisis. Contagion is rather the issue: would a Greek default trigger investor panic in larger countries of the Eurozone? Italy has been seen as the elephant in the room since Silvio Berlusconi’s long-hoped for yet precipitated departure in December of last year. The stagnation of the Italian economy and long-standing structural issues in the government’s finances has preoccupied many looking at the long-term economic picture of Italy. But is Italy still the biggest problem child of Europe?

GDP growth rates for Italy and Spain (1990-2013) (Eurostat)

Unemployment figures for Spain and Italy in 2011-2012 (Eurostat)

Spain, though, appears to be in another altogether different quandary. Unlike Italy, Spain has been growing within recent memory. The GDP growth-rate graph above shows how Spanish growth rates were consistently higher than those of Italy throughout the 90s and much of the 00s. Spain’s growth rates, however, converged with those of Italy starting with the 2008 crisis, and appear to remain at the same level into 2013. As the second graph shows, Spanish and Italian unemployment figures show no signs of convergence. In fact, Italian unemployment rate for February appear noticeably below the Eurozone average of 10.8%. On a scarier note, Spanish youth (16-24 year-olds) unemployment rates had been noted in the 40% levels and rising throughout 2011; they have been reported over 50% in both December 2011 and January 2012, almost identitical to Greek figures. The counterargument is that Italy has built up far greater debt than Spain (in 2007, Spain’s gross government debt was just 36% of GDP while Italy’s was as high as 115% of GDP in 1999), and has less room and time to maneuver than its Iberian compatriots.

The European Union has now made its voice heard. After encouraging Spanish austerity measures last year, the EU was befuddled by Spanish refusal to meet budget deficit targets in early March. Spain seemed to be saying that it had been following austerity measures to a tee, but that it could do no more. Also in March, Italian Prime Minister Mario Monti (an economic technocrat himself) wavered between confidence and concern for the Spanish economy, saying that, “contagion as a whole, I hope, will soon belong to the past now that more discipline has been adhered to by most member states.”

It is just this discipline that worries many. David Powell writes in March 22nd’s Bloomberg Briefs that Spain appears more likely to exit the euro area than Italy due to the effects of overvaluation of the euro in relation to the local economy, as well as “tight monetary conditions.” Overly-restrictive austerity measures may be backfiring, say some, as the recently elected PM Mariano Rajoy’s party has lost regional elections in Andalusia in late March. More importantly, the EU and Spain have been in talks this week about a potential bailout for Spain. While a bailout was not deemed necessary, the fact that the talks were thought necessary frightens many. This in turn has caused a more than one percent jump in 10-year bond interest rates since March 2. This rise was signaled by Spain’s failure to meet EU budget deficit criteria for their 2012 budget earlier in the month. Where Spain will be in a few months, or a year, is a far more difficult signal to decipher.

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