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Even as the 27 finance minsters of the European Union gathered in Brussels yesterday and ordered Greece, again, to impose yet more hardship on its people in order to slash the national deficit, some may have been eyeing their colleagues around the Brussels meeting room warily.
For all are concerned about which nation might next suffer from the dreaded "contagion." The fear is that the next member of the so-called "PIIGS" — Portugal, Ireland, Italy, Greece and Spain — to suffer a crisis of confidence will be Spain.
Representatives of the continent's stronger economies chimed in on the need for austerity in Athens. The German deputy finance minister Joerg Asmussen, whose government has proven resistant to calls for a bailout, said that Greek efforts will "have to measure up" to steps taken by Ireland, which cut public-sector wages sharply. "We certainly won't let them off the hook," added the Austrian finance minister Josef Proell. His Swedish counterpart, Anders Borg, called for Greece to take more "concrete steps to regain credibility."
And yet fears are growing that, even though the Greek crisis is far from resolved, Spain could be the next "weak link" as the Greek Prime Minister, George Papandreou, described it a few weeks ago. It would certainly be standard market practice, analogous to the way they chased successive investment banks into the ground in 2008. Now the Spanish Prime Minister, Jose Zapatero, has virtually admitted as much is happening to him, blaming "speculators" for Spain's travails.
At first glance, Spain is in a much more secure position than her "Club Med" neighbours, because she starts with a level of national debt that is comparable to the UK, France and Germany – around 60 per cent of GDP (against well over 100 per cent in Greece) – and her banking sector has not, yet, suffered from quite the same meltdown as other economies that enjoyed a property bubble in the early years of this decade, notably the British, and Irish.
Spain's banks are strong and acquisitive, stronger than most other countries' institutions. But Spain's annual budget deficit, like the UK's and Greece's, has spiralled well into double figures – at almost 12 per cent of GDP it rivals Greece's Olympian disregard for the old Maastricht treaty rules of prudence.
And the markets are worried. Not, admittedly as fretful as they are about Greece, but the market price of insuring Spanish government debt has jumped in recent weeks (the mysterious-sounding credit default swaps), and now stands at €139,000 per €10m of debt – four times the cost of insuring an equivalent German bond.
The problem is size. The Nobel Prize-winning economist Paul Krugman put it this way: "In economic terms the heart of the crisis is in Spain, which is much bigger". The EU's Competition Commissioner Joaquin Almunia – a Spaniard – has suggested that Spain's economic problems look increasingly like those of Greece and Portugal. But in a worst case scenario, Greece is affordable – about 2.5 per cent of European GDP.
Spain, conversely, accounts for about 16 per cent of EU GDP, and is a much more expensive proposition for restoration work. Indeed, there are some grounds for supposing that, even if Berlin wanted to, it might be unable to afford to take on Spain's fiscal challenges. The IMF remains an option, but the damage to the eurozone's cohesion and credibility would be that much greater if an IMF team had to do what the EU demonstrably could not.
Underlying Spain's problems is a badly distorted economy. Unemployment is the obvious threat to stability. At almost 20 per cent of the workforce, there is little doubt that the Spanish economy seems peculiarly unable to generate jobs. Its bubble economy depended on a real estate boom; now its underlying competitiveness is in doubt.
In the 1980s, Spain was the location of choice for many foreign companies wanting access to the European market; now the showpiece GM factory in Zaragoza, only 30 years old, will be one of the hardest hit in the GM Europe restructuring. Jobs are heading to Eastern Europe, India and China.
Spanish productivity growth is disappointing. The labour market is also notoriously inflexible. That has helped push the property downturn into a slump, and left Spain teetering on the edge of a deflationary disaster. Elena Salgado, Spain's finance minister, recently declared Spain "is not Greece." She may have to start working harder to convince the markets that the similarities are just coincidental.
from London, for Independent minds