By: Dr. Mike Campbell

Spain has been regarded as a contender for needing an EU bailout almost from the outset of the sovereign debt crisis in Europe. The problem is that once the bond markets start to believe that a nation is going to have trouble covering its borrowing needs, the cost of borrowing rises and you have the makings of a self-fulfilling policy.

Towards the end of last year as Greece threw a spanner in the works of its second bailout deal with the short-lived suggestion that the matter would be put to the Greek people in a referendum, Italy and Spain found their borrowing costs pushed up. The yield on Spanish 10-year bonds peaked at 6.7% before falling back to 5% today (the average yield between 1993 and 2012 has been 5.77%, to put matters in perspective).

Spain has the unenviable record as the country with the highest level of unemployment within the EU at just under 23% - well over twice the average for other nations in the Eurozone block. This means that revenue from income tax is decreased whilst social security spending is boosted – not a good recipe for debt reduction.

Looking Back, Looking Forward

Data just released for Q4 2011 show that the Spanish economy shrank by 0.3%. The whole year figure showed growth of 0.3% which beat analyst’s expectations of a 0.2% expansion. It is seen as likely that Spain will re-enter recession and indeed the Bank of Spain is anticipating that the economy will shrink by 1.5% this year.

One method of boosting the economies of Spain, Portugal, Italy and, of course, Greece would be for the governments to draw in foreign money by boosting the tourism trade: solidarity sunshine, anyone? Sadly, Ireland wouldn’t benefit from the sunshine move, but it is a beautiful land with many other charms, of course.