Spain GDP Down 1%, Panic Spikes

Spain’s gross domestic product fell 1% year-over-year in the second quarter and 0.4% from the first quarter of 2012. That, coupled with an unemployment rate of 24%, will cause the debate about austerity vs. stimulus to take center stage again as Europe considers a bailout of the country. Unfortunately, any stimulus will come too late.

Spain’s bond yields remain at what the market likes to call “unsustainable” levels. Put another way, the bailout of Spain’s banks and weakest provinces is no longer considered adequate to salvage a country in which austerity measures cannot keep up with falling GDP. Add to the problem the trouble Spain has collecting taxes, and the mix is toxic as the new government tries to find solutions to a problems that can no longer be solved.

The government already has said it cannot meet deficit goals for next year. It has said cuts through 2014 will total 10% of GDP. That would be similar to a U.S. cut of $1.4 trillion. In other words, such a drop is impossible without laying waste to nearly everything that could help the Spanish economy to remain on its feet.

Economists have begun to think that a bailout of Spain is impossible to avoid, and the GDP figures reinforce that. The cost to bail out the nation’s banks has been put at about $130 billion. A full-on rescue of the country would have to be much greater than that, which would strain funds that the eurozone has in place, particularly if Italy should need money. A bailout well into the hundreds of billions of dollars also would make Germany, the de facto bank of the region, consider whether with Spain it will throw good money after the bad its has put into Greece. The German government continues to question the value of Greece to the alliance of nations formed more than a decade ago.

Stimulus is no longer a short-term option for Spain. The recession there has deepened too quickly. It will take years to resurrect its economy. A bailout would need to be followed by tens of billions of dollars to promote job growth, infrastructure improvement and a rebuilding of Spain’s economy. There is no chance of that now as concerns about Italy have increased. Spain is in for a recession that will last for years.

Douglas A. McIntyre