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The worst of Europe's debt crisis may be over, at least that's according to the IMF and the European Central Bank. But there's still one persistent problem - Spain. Markets are jittery with fears that Europe's fourth-largest economy could be next to fall. Spain has slashed billions in spending, but unemployment and debt are still rising.
As Lauren Frayer reports from Madrid, many wonder if all that prescribed austerity is doing more harm than good.
LAUREN FRAYER, BYLINE: Spanish Prime Minister Mariano Rajoy seems exasperated, repeating himself.
MARIANO RAJOY: (Foreign language spoken)
FRAYER: Spain will not be rescued, he said late last week at a news conference on a trip to Poland. It's not possible to rescue Spain, there's no intention of it and we don't need it.
But the markets seem to believe otherwise. Spain's borrowing costs are pushing levels that sent Greece, Ireland, and Portugal into bailouts. All this even after Rajoy slashed $35 billion from his budget in a single year, says Gayle Allard, an economist at Madrid's IE Business School.
GAYLE ALLARD: This is the most restrictive budget in their history. This labor market reform is the most dramatic we have seen anywhere in any country in the post-war period. You know, by far the biggest for Spain. So, what else do they want?
FRAYER: What the markets may want is growth. But Spain's economy is forecast to shrink 1.7 percent this year. With one in four Spaniards out of work, the government is paying more in unemployment benefits and collecting less tax revenue, so it's having trouble paying its debts.
Markets also want signs Spain can stop living on credit. But last month, Spanish banks borrowed record amounts from the European Central Bank just to stay afloat. Bad loans are at their highest level since 1994. And some of the provinces have so much debt, the central government may have to take control of their budgets.
Another problem may be with Rajoy himself. He and his cabinet are notoriously tight-lipped, at a time when Spain might benefit from a vocal, rallying leader, says Fernando Fernandez, another economist.
DR. FERNANDO FERNANDEZ: They never commit themselves to anything unless it's absolutely necessary. He has that in his blood.
(SOUNDBITE OF LAUGHTER)
FERNANDEZ: That's the way he's been active in politics for all his life.
FRAYER: Rajoy was accused of playing politics by delaying some austerity measures until after provincial elections last month in Andalusia. And then his conservatives failed to win a majority there anyway. When he finally did announce his budget, many economists were in disbelief, says Allard.
ALLARD: My feeling when they announced the budget was, oh, they've left a few tricks up their sleeve.
FRAYER: Public sector spending was cut but there were no changes to health, education or sales tax. Allard says that may be to leave room for cuts next year. But the markets may fear Rajoy is in denial about the severity of this crisis.
Now lawmakers are scrambling to revisit those fields, to wring out another $13 billion. Seniors will be asked to pay for prescription drugs for the first time. In schools, classes will get larger and teachers' hours longer. The government's got pressure from the markets on one side, but the people on the other.
(SOUNDBITE OF CHANTING PROTESTERS)
FRAYER: Hundreds of thousands of Spaniards went on strike against Rajoy's cuts last month. Among them was Caetana Varela, a neurologist whose research budget was cut in half. She now makes $700 a month, and had to move back in with her parents. For her, this is the last straw.
DR. CAETANA VARELA: Education and health are the most important things in a country. That's what built a society, education and health. For me, the last thing that should be taken money from.
FRAYER: But she may not have a choice. Jose Manuel Calvo, at El País newspaper, says Spaniards have to get used to paying for services they took for granted in the boom years.
JOSÉ MANUEL CALVO: We think and we say that education is free in this country. And we think that health care is free. No, we don't pay at the door. But we pay through the taxes. We are now realizing that there is no free lunch.
FRAYER: The question now is whether markets will allow Spain even a few more weeks or months to try to get its house in order.
For NPR News, I'm Lauren Frayer in Madrid.
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