A recession in Spain and forecasts of rising unemployment in the17-nation euro area are amplifying criticism of the German-ledausterity agenda in election campaigns this week in France andGreece.

With Spain's largest unions leading marches involving thousandsof protesters in 55 cities yesterday, Prime Minister MarianoRajoy's government battled to prevent Spain from becoming the nextcountry to seek a bailout. In France, with the final round ofpresidential elections on May 6, Socialist frontrunner FrancoisHollande pushed back against German Chancellor Angela Merkel'sfocus on deficit reduction.

“Watching Spain now is exactly like watching Ireland aroundOctober 2010 before Ireland was forced into its bailout,” MeganGreene, a senior economist at Roubini Global Economics LLC, toldBloomberg Television's “Street Smart” on April 27. “The governmentcan't win no matter what it does.”

Spain's economy shrank in the first quarter as the nationofficially entered its second recession since 2009. Gross domesticproduct contracted 0.3 percent. Joblessness in the euro areaprobably to rose to 10.9 percent last month, the highest since1997, according to economists surveyed by Bloomberg. The data willbe released May 2.

As Spanish joblessness reached almost one in four of theworking-age population, Hollande demanded that euro-area leadersmove to promoting growth from cutting budgets, as agreed by 25European governments in the so-called fiscal pact. Merkel drew theline at re-opening talks on the fiscal treaty, though she saidgrowth could be boosted with labor-market reform and European Unionfunding.

“There will be no new negotiations on the fiscal pact,” Merkeltold the Leipziger Volkszeitung in an interview published on April28. Even so, EU leaders may consider measures such as strengtheningthe European Investment Bank as part of a package of growthinitiatives to be discussed at their summit meeting in June, shesaid.

The debate was spurred on by European Central Bank PresidentMario Draghi last week after he called for a “growth compact”consisting of structural changes and improvements incompetitiveness to enhance the fiscal pact.

“If the conversation has shifted toward this, then it shows thatthey're moving toward a way to put their economy and their currencyon a more stable footing,” William Adams, a senior internationaleconomist at PNC Bank NA in Pittsburgh, said in an interview. “It'sa process you're going to measure in years rather than months.”

EU Investments

The EU is working on an investment package of 200 billion euros($265 billion) for infrastructure, renewable energy and technologyin the euro-area's worst-hit countries, El Pais newspaper reported,citing unidentified officials familiar with the plan. The fundswill come from 12 billion euros from the European FinancialStabilization Mechanism to boost the capital of the EIB, El Paissaid.

A war of words erupted last week between Hollande, who decriedGermany's fiscal-focused leadership in the two-year-old financialcrisis, and Merkel, who said that the turmoil can't be resolvedwithout cutting debt. Polls show that Hollande is likely to succeedNicolas Sarkozy as France's next president after winning the firstround of voting April 22.

“You, the French people, are going to vote to give Europe a newfocus on growth, on progress, on the future,” Hollande told 17,000campaign supporters yesterday in Paris. “The head of the ECB canalso see that some government heads also understand that austerityalone won't help cut debt. They are starting to hear what we aresaying,” he said.

Greece will also hold elections on May 6, with polls indicatingno party will win enough votes for a parliamentary majority. Thelack of a clear mandate could complicate Greek bailout efforts,since the new government must spell out to global creditors in Junehow it will make fresh budget cuts.

Spain figured at the center of last week's debate, withborrowing costs climbing after Standard & Poor's cut thekingdom's sovereign credit rating for the second time this year, toBBB+ from A, on concern about further fiscal tightening and thecountry's banks.

Spain's 10-year yield climbed as high as 6 percent April 27,bringing the gain this year to almost a percentage point. The notesyielded 5.88 percent at 8:20 a.m. in London.

Roubini's Greene said that concerns on Spanish debt wereself-sustaining as markets gyrated from worries about the effectsof more austerity to a lack of budget discipline. She predictedSpain would seek bailout aid early next year.

“Yields rise and the Spanish government announces furtherausterity measures — the markets freak out because they worry aboutthe impact of those austerity measures on growth,” Green toldBloomberg. “If the Spanish government doesn't announce austeritymeasures, the markets don't think that the Spanish government isserious about reining in its fiscal dynamics.”

Bank Recapitalization

Rajoy in March scrapped Spain's aim to cut its budget deficit to4.4 percent of output this year after a slumping economy threw thenation's ambition to consolidate its finances off course. As Spainpushes through the deepest budget cuts in at least three decades,the country's banks probably need 50 billion euros in capital,according to Morgan Stanley estimates.

Protesters in Madrid yesterday filled the city's Puerta del Solsquare despite the rain, with placards reading “No bread, nopeace.” The protests follow a report last week showing that Spain'sunemployment rate rose to 24.4 percent in the first quarter, thehighest level in 18 years.

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