Will the Spanish economy need bailing out?

The influential daily German newspaper ‘Frankfurter Allgemeine’ has published an article called ‘Spain’s Opportunities’ in which it states that despite large debts it is not fair to compare Spain to other problematic countries in the Eurozone such as Ireland, Greece or Portugal.

The article goes on to say that following Ireland’s request for a bail out by the EU the question on everybody’s mind is whether Spain will do the same. However, according to ‘Frankfurter Allgemeine’ the Spanish economy is much stronger than the economies of Greece, Ireland and Portugal put together.

In its analysis of the Spanish economy the article recognises that Spain managed to avoid a complete crash in the property market although the long term consequences are still unknown. It also points out that Spanish building societies are in a weak position despite recent mergers and state funding with the real possibility of the Spanish government having to provide further money to top up their capital.

The amount of debt owed by Spanish households is also much higher than the average for most European countries. However, the biggest problem that the economy faces is unemployment which is currently around 20% with one out of every two Spaniards between the ages of 18 and 25 years old without a job. The article comments that the Spanish economy is currently stagnating and there are few indications that it is beginning to grow significantly.

Nevertheless the article says that despite enormous debts Spain cannot be placed in the same box as other problematic countries in the Eurozone although its current debts are equivalent to 64% of its GDP – a situation in which other European countries such as Germany would be happy to be in.

The article recognizes the decisive steps taken by the Spanish government aimed at reducing the national debt and stimulating economic growth.

Namely reducing state spending by 5% and increasing VAT from 16% to 18%. The article forecasts that the budget deficit which was 11% in 2009 will go down rapidly to 6% and return to 3% in the near future.

It also states that reforms to pension laws, although very unpopular with the electorate, demonstrate the resolve of Zapatero’s government to address Spain’s situation and also show that the government understands the need to regain the confidence of the markets.

Finally the article says that the Spanish economy looks unlikely to return to dynamic growth anywhere near soon due in part to its dependence on the service sector. However it points out that this is a secondary problem compared to state insolvency.