Spain's economic problems are so bad that they will likely lead to the breakup of the euro zone, says New York University economist Nouriel Roubini.
Spain, including Greece and Ireland, are facing massive debt burdens but their membership in the euro zone prevents them from devaluing their currencies in an attempt to export their way out of their problems.
“Down the line, not this year or two years from now, we could have a breakup of the monetary union,” Roubini tells Bloomberg.
“The euro zone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union.”
European Central Bank President Jean-Claude Trichet has said the 16-nation euro area would not break up despite speculation of a breakup mounting in financial markets.
While Greece grabs headlines due to its deficit problems, Spain is the real threat to the euro zone because its economy is larger, its unemployment is more than twice the EU average, and its banks are weaker.
“If Greece goes under that’s a problem for the euro zone,” Roubini says.
“If Spain goes under, it’s a disaster.”
Of all the countries in the euro area, only Spain will remain in recession this year, according the International Monetary Fund, Reuters reports.
The IMF is predicting the Spanish economy to contract 0.6 percent in 2010 and grow 0.9 percent in 2011.
High unemployment rates will hamper recovery while the country needs more wage flexibility in order to get companies hiring again, says Jorg Decressin, who heads the IMF's world economic studies division.
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