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Spain Struggles as Europe Questions Austerity Drive

Union picketers try to stop a truck at the entrance of Malaga's main food warehouse, early March 29, 2012.
Union picketers try to stop a truck at the entrance of Malaga's main food warehouse, early March 29, 2012.
Henry Ridgwell

Spain's economic crisis has deepened as unemployment has reached a record high and its credit rating is downgraded.  It comes as fears grow across the continent that the worst of the euro crisis may not be over - and a growing belief that the German-led prescription of harsh austerity may not be working.  

Protest marches have become a common sight in Spain - but this was one of the most colorful.

Wearing masks and exotic costumes, prostitutes demonstrated in Barcelona Friday against the city's plans to outlaw street prostitution.

The spokesperson for the group, who calls herself Montse, says because of the economic crisis they can't get any other job.

"There are no real alternatives to earn a living," said Montse. "Jobs need to offer enough money to support a family."

Spain's unemployment has hit a record high of 5.6 million, or nearly a quarter of the potential workforce.  The rating agency Standard and Poor's downgraded Spanish sovereign debt Thursday and the country has fallen back in recession.

Tobias Blattner is chief European economist at Daiwa Capital Markets.

"At the same time we have this very austere budget, actually the most austere budget since the 1970s in Spain," said Blattner. "And that obviously leads to a lot of concerns in the markets about the growth prospects of Spain."  

Austerity versus growth: the debate now at the heart of Europe's crisis is whether countries can cut ((eliminate workers and programs)) their way to back to economic health.

Like Spain, Italy has seen its borrowing costs rise in recent days.

After the economic crisis hastened the fall of Silvio Berlusconi last November, Italian Prime Minister Mario Monti  shepherded through a harsh austerity program. At a European Business Summit Thursday, Mr. Monti said it was time to re-focus on growth.

"Structural reforms per se will never deliver growth because if a country becomes more productive and more competitive but there is no demand for its products domestically or around it growth will not materialize," said Monti.

Analysts say debt-laden governments like Italy face a delicate balance; convincing the markets they are solvent while also trying to invest to grow their economies.

Even Britain, with a top credit rating and access to cheap borrowing, has just slipped back into recession.

Again, Tobias Blattner of Daiwa Capital Markets:

"It just shows again I think that too much austerity which is obviously the preferred policy of the UK government is maybe not the right approach to tackle the situation right now," he said.

After a few months of respite, analysts say that Europe is once again in danger of plunging back into an economic storm.  

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