Spain Finally Implodes

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The primary concern about Spain’s financial situation has been that its economy would disintegrate to the point at which it had no hope of addressing such horrible problems as 25% unemployment and its need to raise money in the international capital markets. Spain has reached the point from which there is no return in the foreseeable future.

One of Spain’s best hopes to improve its economic fortunes was austerity programs that might decrease national expenses more quickly than revenue might fall. With new news that Spain’s gross domestic product dropped 0.7% in the fourth quarter of last year, that strategy has become impossible.

The European Central Bank president’s guarantee that the bank would support the bonds of the European Union’s most troubled nations buoyed Spain’s prospects. This helped bring down yields on almost all sovereign debt. However, its power to help the most unfortunate nations has begun to wain.

ECB President Mario Draghi stated late last year that Spain had become a special case among nations in the region. The country would need to be more transparent about its budget, if it wanted aid, and would have to directly ask for money as a part of an overall plan to cut the rate of increase in the nation’s deficit and debt, Draghi said.

Spain’s leverage to keep its budget free from the hands of its neighbors and to press for ECB aid without that oversight has effectively ended with news of the 0.7% GDP drop. The Spanish government can no longer argue that it can repair its own ship.

It looked for a short time that once the crisis in Greece had passed there would be a respite for EU leaders and the ECB because the financial collapse of many national economies had slowed. Conversations about stimulus for some weakened nations, unthinkable just months ago, have begun.

Spain was supposed to prove the case that austerity and deficit improvement could exist together. That case is effectively dead now.

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