From The Atlantic:
It’s hard to see anything resembling a case for optimism. Even though the Spanish government’s borrowing costs have fallen since the ECB introduced its backstop, Spanish business borrowing costs have not. Small and medium-sized enterprises can’t get capital except on prohibitively expensive terms. As Ryan Avent of The Economist points out, this broken monetary transmission mechanism means austerity is hurting Spain more than it otherwise would — which is clear enough in the data. Despite its cuts, Spain’s deficit actually worsened from 9.4 percent of GDP in 2011 to 10.6 percent of GDP in 2012, because its economy fell more than its borrowing costs. The only hint of good news here is Spain just announced it will take two more years to hit its deficit target. But less (self-defeating) austerity isn’t enough. Spain needs stimulus. And it might need bailouts (or, if Cyprus does turn out to be a “template”, bail-ins). Indeed, The Economist calculates Spanish housing prices are stillovervalued by 20 percent or so — which will be even more bad news for its banks.I wasn’t exaggerating when I said this is one of the most terrifying things I have ever seen. Spain needs shock therapy for its labor markets, but that’s an impossible political sell when more than a quarter of the population is unemployed. In an ideal world, Spain would pair major reforms with major stimulus; in the real world, it will drag its feet on reforms, try to cut its deficit, and fall deeper into depression.Let me leave you with this depressing question: Assuming everything goes perfectly, how long will it be till Spanish unemployment gets below 20 percent?