Remember a few months ago, when the Greece crisis was finally solved (temporarily), and some people assumed that we could all just finally forget about Europe?
Well, that's over.
Interest rates in Spain are rising rapidly, as investors worry about the country's ability to control its deficit and service its debt load. Spain is much, much larger than Greece, so a simple "bailout" of Spain will be much harder for the European Union to arrange than the rolling bailouts of Greece. Many European banks also have huge exposure to Spain's debt, so a crisis in Spain would spread quickly and hammer them as well.
As Spain's economy deteriorates, the country is also experiencing the same sort of protests that broke out in Greece a couple of years ago. The unemployment rate in the country as a whole is approaching 25%, and the rate for those under 25 is an appalling 51%.
In response to the growing crisis, meanwhile, the EU is insisting on more "austerity"-- cuts in Spain's government spending. The theory is that these will reduce deficits and improve confidence, but in practice the opposite is the case. Starting with Greece, "austerity" measures have made the situation in several countries worse, not better, because they have led to higher unemployment (as government workers are fired), reduced services (leading to social unrest), and more economic weakness (as overall spending shrinks).
The NYT's Paul Krugman argued today that, by pursuing austerity as a solution to the crisis, Europe is "committing suicide." And based on the experience in Greece and Spain, Krugman appears to be right.
No bailouts will permanently fix Europe's debt crisis. The only solutions are:
1) Full fiscal integration, in which Germany and Europe's richer countries assume responsibility for the debts of poorer countries.
2) A Euro breakup, in which the single-currency experiment is ended, and/or;
3) A wholesale debt restructuring, like the one recently arranged in Greece.
For now, none of those solutions are even on the table. So it's back to watching Spanish interest rates...