Spain under the bonnet

• Spain remains in recession while most of the rest of Europe has clambered out.
  
  
• Youth unemployment is 40%.
  
  
• If you're caught by unemployment and the property crash means your home is worth less than the mortgage you can't service, you can't cancel mortgage debt by going bankrupt. So your mortgage debt may stay with you for ever, while court costs ratchet up. Eight per cent of Spain's homes are in negative equity and an estimated 1.4 million Spaniards could face foreclosure proceedings.
  
  
• Spanish local government is in a financial mess.
  
  
• Spain's north/south divide is deepening. Catalonia is set to be led by a government demanding greater fiscal autonomy from Madrid - they want to reduce fiscal transfers to the poorer Spanish regions in the south. That election was the first of a series of regional and local elections due in  Spain in the next six months.
  
  (This is an interesting development. Fiscal transfers from richer to poorer areas are an essential part of a single currency area. Don't just think euro, think peseta too. Northern Spain seems to be inching towards demands for greater autonomy. And think of the forthcoming Irish elections. It's far from certain that the Irish will take the new european hegemony lying down. Could we be about to see a voters' revolt? The EU has made Ireland rerun two referenda, but there's no precedent for Brussels ordering the rerunning of elections. Yet.)
  
  
• During the euro boom, prices and wages rose more rapidly in Spain than in the rest of Europe, helping to feed a large trade deficit. And when the bubble burst, Spanish industry was left with costs that made it uncompetitive with other nations.Without a currency that it can devalue, Spain's only route to restoring competitiveness is by actually cutting wages and other costs. That is painful and takes years.

Should Spain try to break out of this trap by leaving the euro, and re-establishing its own currency, asks Paul Krugman.

Spain would be better off now if it had never adopted the euro — but trying to leave would create a huge banking crisis, as depositors raced to move their money elsewhere. Unless there’s a catastrophic bank crisis anyway — which seems plausible for Greece and increasingly possible in Ireland, but unlikely though not impossible for Spain — it’s hard to see any Spanish government taking the risk of “de-euroizing.”

So Spain is in effect a prisoner of the euro, leaving it with no good options.

So Krugman is arguing that the Iceland solution isn't open to Spain.

On the surface, some of the economy's big financial numbers don't look too bad. Under the surface, though, this big eurozone economy is rickety. The strains on the Spanish economic structure can only increase.