Spain must take tough measures to narrow its fiscal deficit and those steps will lead to “hard times” ahead for the country, says New York University economist Nouriel Roubini.
If the country fails to narrow its spending by not tackling rigid labor laws, for example, it could find itself out of the euro zone in the long run and threaten the overall European economy, says Roubini.
“If Spain succumbs, it will drag with it the future of the European monetary union and decades of political credibility,” Roubini recently told Bloomberg.
The European Union requires member nations to keep budget deficits at 3 percent of gross domestic product but Spain's deficit ran to 11.4 percent in 2009.
Ratings agencies are watching, and they are warning that Spain could see downgrades to its ratings.
Spain says it will narrow its deficit to 3 percent via tax hikes and spending cuts although U.S. credit-ratings agency Standard & Poor's says that figure will hover around 5 percent through 2013 due to weaker economic growth, adding that Madrid's tax collection is too sensitive to domestic demand, according to the Associated Press.
In other words, the agency may suspect that Spain does not have the political will to take measures tough enough to right its ailing economy, and will keep watching.
“Any deterioration over and above our current expectations could put further downward pressure on the ratings,” Standard & Poor's says.
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