Spain's Economy Disintegrates

Spain made an important announcement about its first quarter economic activity and another about the month of April.

The National Statistics Institute said “La tasa de paro crece casi un punto y se sitúa en el 21,29%. Por su parte, la tasa de actividad baja 11 centésimas, hasta el 59,88%.” (Unemployment reached nearly 21.3%) And, “El indicador adelantado del IPC sitúa su variación anual en el 3,8% en el mes de abril.” (Its consumer price index was up 3.5% in April.)

The most logical conclusion to be drawn from these numbers is that Spain’s economy is quickly shutting down. That means its ability to stand on its own financially has been further compromised, making a bailout more likely.

Estimates of a the bailout costs for Spain range as high as $350 billion when its banks are taken into account. That will stretch the limits of the current EU bailout facility, which means members will be asked to put in more money. Germany, the de facto bank of Europe, has already signaled that its voters are against additional bailouts.

The theory behind a collapse of the eurozone is that the trouble will begin in Greece. Most capital markets investors think it does not have the financial wherewithal to refinance its debt. That will cause a default, and even if it can write down which is supported by investors, it could lead to similar actions by Ireland and perhaps Portugal.

The wave of defaults, if there is one, could happen another way around. Spain, which is by far the largest needy economy, may not get financial support. It could be the first eurozone nation to default and the dominoes would begin to fall beginning with the largest one.

Spain’s economic statistics may have been worse than expected or they may have been better. It has been said before, but is worth saying again: A nation with 21% unemployment which is plagued by inflation that is certain to grow cannot hang on indefinitely.

Douglas A. McIntyre