Europe's Debt Crisis: Five Threats to the Common Currency

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An anti-capitalist piece of graffiti in Athens: Greece's debt crisis is just one of the euro zone's many problems. Zoom
DPA

An anti-capitalist piece of graffiti in Athens: Greece's debt crisis is just one of the euro zone's many problems.

Spain: The Biggest Threat to the Euro?

Spain is well on its way to becoming the EU's next problem child. Indeed, experts fear that the country could become an even greater threat to the stability of the euro than Greece. "The biggest trouble spot isn't Greece, it's Spain," wrote Nobel prize-winning economist Paul Krugman in his blog recently. He also expressed concern about the burst real-estate bubble in the country. Economics professor Nouriel Roubini likewise sees Spain as being the biggest threat to the European common currency. The Financial Times has also pointed out that the next big problem for Europe is to be found in Madrid.

The country's public debt is relatively low, at 54.3 percent of gross domestic product. But the potential dangers for Europe are much greater than those emanating from Athens, because the Spanish economy is four times as large.

Key Facts: Spain

Debt ratio: 54.3 percent of GDP

Budget deficit: 11.2 percent of GDP (2009)

GDP growth: -3.7 percent (2009 forecast)

Share of the euro zone's GDP: 11.8 percent (2008)

Source: European Commission

And there are fears that Madrid's debt could skyrocket in the next 12 months. The budget deficit spiked in 2009 to 11.2 percent of GDP. Furthermore, the country's economy has not followed the upward trend of most industrial states. According to IMF forecasts, Spain will be the only large EU state which will not experience economic growth in 2010.

Economists have little hope that the situation will improve in coming years. The motor that led the Spanish economy to flourish through the middle part of the 2000s, the real-estate sector, was demolished by the financial crisis. For years, the country benefited from an unprecedented construction boom, fuelled by rampant speculation. Now, half-finished settlements of new homes have become ghost towns and unemployment has grown dramatically. Fully 4 million Spaniards are without work, a jobless rate of more than 20 percent.

As a result, Spain needs to restructure its economy to a greater degree than most other countries in the common currency zone. At the same time, however, Madrid must follow a strict savings regime to pay down its debt.

To satisfy EU skeptics and begin the reform process, the government of Prime Minister Jose Luis Rodriguez Zapatero has presented an economic savings and reform plan. By 2013, the country wants to cut expenditures by €50 billion and shrink the budget deficit to 3 percent, as called for by euro zone rules. But the plan quickly became an embarrassment. Just hours after submitting the plan to EU bean counters in Brussels, Madrid had to make corrections. The paper called for deep cuts to pensions, which resulted in a storm of protest in Spain. The passage was cut. "We are dealing with an unbelievably botched plan," wrote the paper El Mundo the next day.

Investors, understandably, are concerned. The spread between Spanish state bonds and benchmark German bonds -- a measure of the perceived risk of the bonds -- is currently over one percentage point.

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