Experts: Economic Fall of Spain Could Doom Euro

Thursday, 04 Mar 2010 03:48 PM

By Dan Weil

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The financial turmoil afflicting Europe began in Greece, and now it’s spreading to Spain.

That could spell doom for Europe’s common currency, experts say.

"Spain is the real test case for the euro," Desmond Lachman of the American Enterprise Institute told The Wall Street Journal.

"If Spain is in deep trouble, it will be difficult to hold the euro together . . . and my own view is that Spain is in deep trouble."

Spain is the fourth biggest economy among the 16 nations that use the euro. And it’s suffering big time.

The economy shrank 3.6 percent last year and will likely contract again in 2010. That would mean Spain is suffering its worst recession in 50 years.

Unemployment has surged to 19 percent. A housing bubble is bursting, and the budget deficit and debt burden are soaring, just like in the United States.

Thanks to its euro membership, Spain’s options to buoy the economy are limited. It can’t loosen monetary policy, because that’s controlled by the European Central Bank.

And with a budget deficit that totals 11.4 percent of GDP, it’s difficult for Spain to increase spending or cut taxes. Bond traders already are pushing up the government’s interest rates.

Many experts say the euro will continue to drop.

“It’s become the world’s most hated currency over the last few weeks and is likely to stay that way,” Kit Juckes, chief economist at ECU Group, told Bloomberg.

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