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Forex Trading Fundamentals: European Politics and the Spanish Economy

Posted by Joseph Trevisani on Jan 21, 2013 4:31:00 PM

Europe's fourth biggest economy continues to deteriorate, worrying forex trading professionals. Spanish unemployment is rising, exports and house prices are falling and GDP is likely to register its fourth consecutive negative quarter when the figures are reported by the Bank of Spain on the 30th of this month.

The Spanish government will struggle to meet its European mandated austerity budget goals and public sector workers are guaranteed to join the jobless rolls in increasing numbers. The economy is likely to shrink 1.5% this year according to economists after contracting 1.4% in 2012. Madrid is expected to miss its 6.3% of GDP deficit target for 2012 despite increases in income and sales taxes and slashing wages and benefits.

Without economic growth and the boost it gives to government revenues Spain will never be able to dig out of its debt pit. But the realities of EMU politics have forced Prime Minister Rajoy into pro rather than counter cyclical economic policies. Put simply, Spain has been forced to make its recession and unemployment far worse because it has chosen to live within the straightjacket of the euro.

Spanish voters know that the government is complicit in the collapse of the economy. So far they have not blamed the euro.

In the pre-euro world, the Spanish peseta would have long since been devalued by the currency markets as the central bank cut domestic interest rates to spur economic activity. Exports and economic growth would be climbing and Spanish voters would have a better, if distant, future insight rather than endless austerity and a shrinking economy.

Much of Europe is in a race for economic recovery before the voters abandon belief in the euro. The ultimate question in Spain, as in Greece, Portugal and Italy, is how much economic pain the population will tolerate before the euro becomes the culprit.

There may be no Spanish political party currently advocating an EMU exit. But when and if the voters decide that the euro must go politicians and parties will arise to ride that wish to power.

The history of this year could be as much political as economic. Forex traders beware


Joseph Trevisani

Chief Market Strategist


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