Editor's note: Peter is an economics writer at foreign exchange specialist Pure FX. He has written for countless expat sites about the exchange rates, including culturespain.com and americansinfrance.com. In addition he is an expat himself, based in Madrid with his girlfriend and pet canary. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. .

Could Spain Re-Ignite The Eurozone Debt Crisis?

For politicians in the Eurozone, the last three months have given them an opportunity to catch their breath.

Borrowing costs have fallen across the board, indicating that the markets are less nervous about the possibility of an impending collapse. Stock markets have recovered. The euro too has gained ground against the US dollar, clawing back more than six cents compared to its nadir in mid-Jan.

This is down (if nothing else) to the fire-fighting tactics of the European Central Bank. It has poured more than €1tn in public funds into the financial system since December. This led some (notably French President Nicholas Sarkozy – ever the dramatist) to declare that the worst of the debt crisis is behind us.

Yet this past fortnight, there have been signs that all is not well in Euroland. Though it's not making headlines, the markets already expect Greece to request a third bailout before we see 2013. Portugal too might require more aid. Yet the biggest wrinkle in the mask of calm is undoubtedly coming from Spain.

Spanish Wobbles

Since coming to power at the tail end of last year, Mariano Rajoy's government has sent unnerving signals that its commitment to cutting Spain's debt is not absolute. The biggest of these came last month, when Mr. Rajoy violated the terms of a fiscal union he had signed only hours before, and declared he would autonomously be setting Spain's deficit reduction target for 2012.

Mr. Rajoy claimed this was to avoid setting off a vicious circle in Spain, whereby spending cuts trigger higher unemployment, which triggers falling revenues, which necessitates more spending cuts. This is a cycle into which Portugal (and arguably the UK) have fallen into. He is right to be concerned about this. Yet coming just hours after an EU summit emphasising the importance of both fiscal unity and discipline inside Europe, it was absolutely the wrong signal to send.

Elections in Andalucia last week have added to nervousness. The failure of Mr. Rajoy's Popular Party to secure an outright majority has not only caused concerns that public appetite for his spending cuts program is fleeting, but that he'll have a tougher time limiting regional spending in Andalucia. This comes following fierce resistance from Catalonia, which rejected Madrid-set targets in 2011.

Rajoy Must Show His Determination

The concern is not that Mr. Rajoy is about to relax his spending cuts program in order to preserve his popularity in Spain. The threat of a general strike this Thursday aside, he has a parliamentary majority in Madrid and a mandate to do as he likes. Instead, the concern is that Mr. Rajoy lacks the discipline to impose austerity on his country, and that he'll prove unable to reign in regional spending.

In his Budget later this week and beyond, he must prove otherwise to avoid the markets abandoning Spain, and re-igniting the European debt crisis.

Note: The views and opinions expressed in guest blogs are those of the contributing author and do not necessarily represent the views of BcnIn.