Could Spain leave the Euro zone? That's certainly the subtle implication in this morning's Wall Street Journal. A combination of factors is stressing Spain's economy to the breaking point, and being in the Euro zone means the government's ability to respond is very limited. A brief recap: unemployment is at 20%. A housing bubble has burst, leaving many homeowners feeling poor and upside down on mortgages. The GDP contracted nearly 4% in 2009 and is expected to shrink again this year. The country is in its worst recession in 50 years. As a result, holders of Spanish debt are demanding higher interest rates, requiring the government to go even deeper into debt. Unlike the current crisis in Greece, though, Spain is a lot bigger -- it's the fourth largest economy in the Euro-zone, and a debt crisis in Spain would be a lot more disruptive than what we've seen so far from Greece.
Spain has three options: do nothing and live with years of economic stagnation, launch an "austerity program" to cut back on government spending including generous government benefits for the unemployed, or leave the Euro zone. Leaving the Euro would immediately allow the government to devalue its currency, allowing exports to become cheaper and the economy to grow again. While that seems like a dramatic step, the first two options are politically unappealing. In either of the first two options, richer European countries may have to step in with a bailout -- to the tune of more than 250 Billion Euros -- to maintain confidence in the Euro.
Bottom line: anyone or any company contemplating doing business in Spain is going to have to look very closely at any proposition, because the economy seems to be headed for some really rough waters and no one knows when things will become calm again.
The Euro's Final Battleground: Spain - WSJ.com
No comments:
Post a Comment