1. http://www.bloomberg.com/news/2013-02-03/spain-s-disappearing-
economy-demands-a-bold-new-approach.html

2. If you catch yourself feeling a little more
optimistic about Europe’s economic prospects
now that the cost of government borrowing has
eased, take a look at Spain. With an
unemployment rate of 26 percent -- about one
in three of all jobless people across the euro
area -- Spain is entering its fifth year of
recession and the pace of contraction is
actually accelerating. The country’s austerity-
first approach to budget policy is a main
reason.

3. Nobody doubts that Spain needs further economic
reform, especially in its notoriously dysfunctional
labor market. Its fiscal position is unsustainable, too.
Spending cuts and tax increases will be needed to
balance the books long term.
Spain, however, stands as the classic example of self-
defeating fiscal stringency: Its efforts to curb deficits
too much, too soon have squeezed demand to the
point that budget targets have been missed and the
economy keeps shrinking.

4. Gross domestic product fell 0.7 percent in the
fourth quarter, a bigger drop than the Bank
ofSpain and most private forecasters had
expected. When comparing fourth quarter over
fourth quarter, Spain’s GDP fell 1.8 percent in
2012. Domestic demand dropped more
abruptly last year than in 2011, mostly because
of repeated rounds of budget cutting. Retail
sales were 11 percent lower in December 2012
than the year before. Unemployment, in other
words, is headed even higher.

5. Missed Targets
Despite increased taxes, spending cuts and
public-sector firings, the government keeps
missing its deficit targets. The government says
it probably did so again last year, when its
deficit goal was 6.3 percent of GDP. For
now, though, it stands by its promise to the
European Union that the deficit will fall to 4.5
percent of GDP in 2013. With the economy
shrinking at its present rate, that isn’t going to
happen.

6. Last week, Olli Rehn, the EU’s economic and
monetary affairs commissioner and chief
budget enforcer, hinted that Spain’s deficit
targets could be eased. An assessment of its
fiscal program is scheduled for this month.
Some further relaxation is necessary, just as it
was last year, but merely accommodating some
of the inevitable slippage doesn’t go far
enough. What’s needed is a deliberate EU effort
to extend collective fiscal support to Spain.

7. The country is experiencing such intolerable economic
stress that its political stability is surely in doubt. The
danger of collapse in that sphere just increased
significantly: A widening corruption scandal is
implicating Mariano Rajoy, the prime minister. The
newspaper El Pais is running articles saying that Rajoy
received regular payments from an undisclosed party
slush fund. Rajoy denies the allegations; inquiries are
under way. With Spaniards struggling to get by in a new
age of sacrifice, the last thing they want to read is that
their leaders may have been living it up with the help of
under-the- table funds.

8. Falling Yields
Government bonds of distressed EU countries have rallied since
the European Central Bankpledged to avoid a euro-area crackup
last summer. This has aroused fears that the pressure for economic
reform will ease.
In the case of Spain, whose 10-year bond yield has fallen from
more than 7 percent at the peak to a little over 5 percent, the
greater danger is just the opposite. This pause in financial-market
stress may convince the government that Spain can avoid seeking
a full international bailout and the fiscal relief that would come with
it.
Yet fiscal relaxation is exactly what Spain needs. With support from
the EU and theInternational Monetary Fund, Spain should suspend
its budget squeeze until its economy shows signs of reviving.

9. Supply-side reforms can’t happen too soon, but new
plans for fiscal consolidation should be delayed. Adopt
them now, but execute them only once the country’s
crippling rate of unemployment has declined. Far from
consenting reluctantly to such a course, the EU and the
IMF should be aggressively advocating it.