Spain is entering a big week, both politically and economically as the government faces some key tests that, if it fails them, could plunge the EU back onto deficit doomwatch.
The government still has the political wind behind it but is struggling to convince the markets it can square the circle of cutting spending while stimulating growth.
Spain now has to find some extra savings to keep this year’s budget deficit to over five percent, and find growth in a contracting market with record unemployment. Many observers say it cannot be done.
But an extra 40 billion euros in cuts is coming.
“Spain passed a very forceful labour reform without consultation, but it did not pay the same attention to its deficit and during these last days it is causing us and causing all Europe great concern, since its interest rates are increasing,” said Italian Prime Minister Mario Monti.
Spain has been unable to get away with an extra half a percent deficit to ease its dole queues on the grounds there is little confidence it will not, like Greece, Ireland and Portugal before it, make the reforms deemed needed to to avoid a full-scale bailout.