Forget Greece – Will it be Spain that Breaks Up the European Union?

(eToro Blog) More bad news today highlights the difficulties that the Spanish government faces to restore economic health to the Eurozone’s 4th largest economy. It was reported earlier by the Spanish Ministry of Labor that the number of registered jobless increased by 0.8% last month from the previous month, and was the 8th consecutive month of increases; the country’s unemployment rate remains the Eurozone’s highest at 22.9%. Spain has in recent days become investors’ newest “headache,” as economists warn that the country’s economy is far worse than believed.

OpenBook activity for the Euro-Dollar, which is currently just off the day’s high at 1.3664, is exceedingly active, with a strong bearish sentiment. Traders are booking profits on both sides of the EUR/USD pair, however. OpenBook guru pyruss, who now has 552 copiers, continues to scalp profitable positions in the pair regardless of direction; most recently, he closed out a long trade which hit its TP for a 2% gain, but has a short position still open and already showing the same 2% return. An 86% allocation in his portfolio for this pair has provided a 0.5% return over the past six months, which is consistent with this guru’s scalping strategy and supports his overall P&L which is 4.4% for the month and which rises to 28.4% over the last six months.

OpenBook guru himlaforex5, who has 187 copiers and 1212 followers, had one long position hit its TP a few minutes ago which provided a gain of 228%, more than offsetting a loss in the pair yesterday. This trader only trades three pairs – the EUR/USD, the AUD/USD and the NZD/USD – but has some exceptional portfolio statistics that include a 50% gain in a 22% allocation in the EUR/USD pair. This trader’s P&L statistics are equally impressive; 1% for the week, 37% for the month, 4,689% for the quarter and 6-months, and 6,097% for the year. This trader has initiated only 39 trades over the past several months, but is a relatively new trader to OpenBook; further, it is clear that this trader carefully analyzes the market before initiating a trade, as the average hold time is only 10 hours. The numbers speak for themselves, however, and it is a near certainty that this guru’s copier base is going to see a marked increase.

Despite a debt-t-GDP of only 66% – far better than the vast majority of other Eurozone members – Spain’s key problem, and the real threat to the country’s continued existence as a Eurozone member, is its fiscal deficit. As a percentage of Spain’s GDP, the deficit for the last recorded quarter was nearly 9%, well above the 3% (annualized) threshold that is permitted to E.U. members under the Maastricht Treaty. Spain is obliged by law to comply with the Treaty and in an effort to reduce the deficit the government has taken on a multi-pronged approach which includes tax hikes, budget cuts and structural adjustments that would improve the labor situation.

And while the recently proposed austerity measures were welcomed by E.U. policymakers they were largely and vociferously condemned by Spain’s populace. But the proposals also heated up the debate about the effectiveness and logic of using austerity during periods of economic contractions. In large numbers, economists argue that the concept and application of austerity is counterproductive. Austerity, they believe would likely force the country into an even deeper recession which would only exacerbate its existing problems and increase the probability of a default of its obligations. If Spain goes up in smoke – and there is no guarantee that the recently bolstered firewall could prevent it – it could quickly create a wildfire that E.U. policymakers might not be able to contain.

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