Spain’s eye-wateringly high unemployment and the collapse of its real estate market mean that Spain has significantly worse problems than Greece and could threaten the euro zone’s new-found, albeit fragile stability, an analyst told CNBC.com Tuesday.
“Spain has very large downside risks and it needs to tread very carefully – Spain is in a very fragile situation. Its problems are significantly worse than Greece’s,” Sony Kapoor, managing director at international think tank Re-Define said.
He added that a “huge danger” was posed to the macroeoconomic situation and the social fabric of the country by the current austerity program and an expected 5 percent deficit adjustment.
“The financial panic is temporarily over but 2012 will be the year of austerity across Europe and Spain is a microcosm for the euro zone as a whole,” he said.
Earlier this month the Spanish premier Mariano Rajoy, publicly defied Brussels-imposed targets, which were 4.4 percent of gross domestic product, saying that the targets were based on forecasts of economic growth when in fact the government expects the Spanish economy to contract this year.
The country has the euro zones highest rate of unemployment - now over 22 percent.
Euro zone finance ministers rebuked the country – the euro zone’s fourth largest economy - at the ECOFIN meeting Monday urging it to make new cuts to its 2012 budget to reduce its deficit by a further 0.5 percent, agreeing a new target of 5.3 percent.
Wolfgang Schaeuble, German finance minister, speaking at the meeting dismissed any comparisons with Greece describing it as a “completely unique case” adding that Spain “had made great progress but we’re all still on a tough path.”
Ben May, European economist at Capital Economics, told CNBC.com that underlying issues in Spain could derail any attempts to curb the budget deficit.
“There are some reports that suggest that public debt might be higher than the official statistics show and there’s a concern that it might end up worryingly high over the next couple of years. The banking system is also fragile and the fact that there’s a housing overhang means we could see a situation like that in Ireland,” May told CNBC.com.
He added that talk of bailouts and defaults would then be ramped up but with far worse consequences than Greece.
“Spain is so much larger than Greece, so even if there is a small risk of a default or a bailout then it has much bigger implications for the euro zone than Greece had,” May added.