The EuroZone Depends On Spain. Here’s Why…

Before tackling how and why the EuroZone’s well being is linked to Spain, some quick background is necessary. The EuroZone became such when the nation states decided after World War II that adopting a single currency for the region would be best. This was legislated in 1992 with the parameters that each nation had to adopt the Euro and drop its respective currency. This treaty also combined differing bodies of power into a three part system, similar to the United States’ Checks and Balances approach.

Looking back:

  • the Euro was created in 1999.
  • Greece joined the European Union in 2001.
  • Circulation of currency and notes occurred in 2002.
  • Smaller nation states join in 2008 and, in the same year, the European Union asked for a 200bn Euro stimulus as the result of the crash of Wall Street banks/firms and the American housing bubble implosion.

This rippled through the world markets like a stone in a pond. Subsequent to this, we saw smaller nation states join (a preventative measure in an attempt to inflate credit worth to stave off market volatility) and the choice by the EU and its nations to implement strict austerity measures following the U.S. economic model. This very loosely brings us to the present.

Spain, if you didn’t know, has a comparatively low loan interest rate, similar to what our Fed has done to aid borrowing in our country. Both countries are at historic lows, which is evident when compared to a growing economy, like China’s. This means government bonds are very cheap and as most economists will tell you, bonds are the safe long-term choice with fantastic yields, assuming the nation in which they are purchased is a stable one.

What makes a country stable? Multiple factors — but several crucial factors are education, unemployment, interest rates, home sales, market confidence and opportunity. That’s a very wide spectrum, so narrowing our focus solely to interest rates and yields coupled with market confidence, we see how austerity measures have beget bailouts have beget austerity have beget more bailouts. This phenomenon is worthy of lengthy discussion in and of itself but what does all this have to do with Europe overall?

A look at unemployment in Spain shows that the rate is among the highest in developed countries. Period. A further look allows us to see that the 24-56 year old demographic in Spain is being hit hardest (~25%). This is indicative of a lacking, if not backsliding development in that which a country needs to support stable growth.

But if Spain continues to rut, where is the connection? Bonds.  Bonds are the connection to the rest of Europe. Though sources differ upon the continuing degradation of their worth, Spanish debt to GDP plus monies owed to the IMF is agreed to be between 138-148%.  Multiplied by the amount of countries in the EU who have bought them in attempts to save the Euro, we are left with a cloud of imminent destruction.  Because of such strict austerity, this mass purchasing of bonds has been deemed necessary (read: bailout).  Once Spain defaults, the dominos fall across all of the EuroZone.