BRUSSELS, Belgium — The words “Spain” and “contagion” have already made history together.
Spanish flu spread around the world in the early 1900s. The pandemic didn't begin in Spain, but it was there that the world realized how serious — and unstoppable — the outbreak had become.
Now, as Spain takes up a central position in Europe's economic crisis, the analogy is clear.
Sickly economies in Greece, Portugal and Ireland may yet respond to the European Union’s limited array of economic remedies.
But if Spain’s attempt to heal itself with a shock-treatment of austerity fails, the EU may not be strong enough to prevent the infection from spreading to Italy, France and beyond.
More from GlobalPost: Spain's labor reforms aren't so popular
“The big question is, can Europe ring-fence Spain, can they draw a line to stop this contagion happening? This is their biggest challenge,” says Carsten Brzeski, senior Brussels economist at the Dutch bank ING.
In the eye of the euro-debt storm late last year, Spain enjoyed a reprieve from the markets after Conservative Prime Minister Mariano Rajoy took office in December with a promise to knock the economy into shape and, more importantly, the European Central Bank’s (ECB) decision to give banks and governments a lifeline by pumping one trillion euros of cheap loans into the euro-zone economy.
More from GLobalPost: How much would a Spanish bailout cost?
Things started to go sour in March when the effect of the ECB’s liquidity injection began to fade and Rajoy announced he wouldn’t be able meet an EU-agreed budget deficit target of 4.4 percent this year, despite 27 billion euros ($35.5 billion) worth of budget cuts and tax hikes.
“Spain is suffering from a serious loss of confidence again,” blogged economist Luis Garicano. “The perspective of a new reformist government had made our creditors think Spain was on the way up, now after the budget and some strange events, confidence has gone again.”
The rates Spain has to pay on borrowed money have been creeping up steadily.
On Tuesday, there was some relief as the country managed to raise 3.2 billion euros ($4.2 billion) in short-term loans, but at much higher rates. A bigger test will come on Thursday when the Madrid government tries to sell longer-term securities.
More from GlobalPost: Argentina wants its oil back
The yield on its benchmark 10-year bond has been edging over 6 percent — which is considered unsustainable for more than a short period. That is prompting concern Spain could be forced to seek a bailout from the EU and International Monetary Fund or worse: the risk of a Spanish default has risen to 37 percent, according to the consultancy CMA.
A bad bond auction on Thursday could cap a tough week for Rajoy, who has already seen Argentina’s President Cristana Fernandez feel confident enough of Spain’s weakness to announce she’s seizing a 51-percent share in the YPF oil company from its Spanish owner Repsol.
By euro-zone standards, Spain’s public debt does not look so bad. At 66 percent of gross domestic product, it’s less than that of virtuous Germany and way lower than Greece at 150 percent or Italy at 119 percent.
More from GlobalPost: The Argentine economy's "fuzzy math" problem
Spain’s problems lie elsewhere. The collapse of a 2000s housing boom plunged families and banks into deep trouble. Household gross debt which averaged 80 percent of income in the decade up to 2007 is now up at 126 percent.
Spanish unemployment is the highest in euro zone, at almost a quarter of the work-force, and double that Spaniards under 25 years of age. The economy is set to shrink this year and the country’s powerful regional governments are resisting Rajoy’s belt-tightening demands.
“We should be worried,” says Brzeski. “That does not mean that they are falling of the cliff or requiring a imminent bailout, but if you look at the combination of weak macro fundamentals, the still falling real estate market, high deficits, it looks increasingly likely that they will at some point in time need European support.”
Based on the bailouts of Ireland and Portugal, a rescue plan for Spain could cost the EU around 300 billion euros ($394 billion) over three years. That just about could be covered by the 800-billion-euro ($1-trillion) fire-wall which the EU hopes to have in place by the summer, but without leaving enough left over if Italy gets into trouble.
A cheaper option, and one that would save Madrid the ignominy of handing over the running of its economy to the EU and IMF, could be a loan from the firewall fund to help Spain recapitalize its banks.
Neither solution tackles what many believe to be Spain’s fundamental problem: how to revive growth so that unemployment lines start to come down and home prices rise. Until that happens the risk of Spain’s economic malaise spreading will remain.