Debt Quicksand Europe Fights the Growing Currency Crisis

By Carlo Angerer, and

Spain: First Signs of Hope

Spain has not yet suffered the debt nightmares of Greece or Portugal.

Spain has not yet suffered the debt nightmares of Greece or Portugal.

How did the crisis start?

In 2008, Spain was rudely awakened from its dream of an economic boom. The rapid economic growth in the middle of the last decade was based on an overheated construction sector that was fueled by extremely low interest rates. When the housing bubble burst in the wake of the financial crisis, hundreds of thousands of Spaniards lost their homes and over a million lost their jobs. Tourism also slumped as a result of the global economic crisis. The country slid into a severe recession.

What has been achieved?

The Socialist government of Prime Minister José Luis Zapatero tried to steer Spain out of the crisis with the help of unprecedented reforms -- partly passed under pressure from the International Monetary Fund. The retirement age was raised and the rigid labor market reformed. There are some initial signs of recovery: Exports and tourism are getting back on track. The government is also making progress in the key economic indicators. In 2010 the budget deficit shrank more than expected. Zapatero recently said he expects faster growth in the second half of 2011.

What are the obstacles?

The biggest problem remains a record unemployment rate of over 20 percent. Among young people the rate even tops 40 percent. The IMF recently warned that Spain needs to make greater efforts to reform the labor market. Spain's young people have also pressured Zapatero -- for weeks -- by protesting the government's policies in public squares. Zapatero faces the next major obstacle at the end of July: The country needs to raise about €16 billion in the capital markets to pay off old debts. Recently, however, risk premiums on Spanish government bonds have once again risen significantly.


Economic Indicators 2008 2009 2010 2011 2012**
Debt (in percent)* 39.8 53.3 60.1 68.1 71
Economic Growth (in percent) 0.9 -3.7 -0.1 0.8 1.5
Budget Deficit (in percent)* -4.2 -11.1 -9.2 -6.3 -5.3
Unemployment (in percent) 11.3 18 20.1 20.6 20.2

*Percent of annual economic output, **Forecast
Source: European Commission; As of May, 2011

The Crisis Countries Compared


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