EU must now figure out how to rescue Spain and Portugal

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(MoneyWatch) COMMENTARY With the Greek debt problem solved (for at least a couple of days), everything is right in Europe, right? Wrong. Attention will now turn to Spain and Portugal, which are also broke and also only surviving on financial handouts. How many nations can the EU afford to pay for?

The Spanish economy is in terrible, terrible shape. Its 23 percent unemployment rate is the highest in the EU. Not a single family member has a job in more than 1.5 million Spanish households. Nearly half of all adults under 25 are unemployed. According to Reuters, Spain is home to a third of the unemployed in the 17-nation euro zone. More than a quarter of the Spanish population is at or below the poverty line.

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That won't change anytime soon as the government is awash in debt. The official total public sector debt is about 70 percent of GDP. But that's really only a partial total. Edward Hugh, a Barcelona-based economist, says it leaves out the unpaid bills of central, regional and municipal governments, the debts of public enterprises and public debt held by the state pension fund. That totals another 17 percent of GDP. (Mind you, that is still less than America's debt of roughly 100 percent of GDP.) Spain's debt will increase by $79 billion - or 6 percent of GDP - this year alone. The economy is expected to contract by 1.7 percent this year, which will more than take care of last year's slight expansion of less than 1 percent.

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Next door Portugal is doing only marginally better. The unemployment rate is a mere 14 percent. The government estimates unemployment will average about 13.6 percent in the coming year. Nearly everyone else thinks that's crazy optimistic because of the huge austerity measures which are about to kick in.

Those measures cut the government budget deficit from 9.8 percent of GDP in 2010 to about 4 percent by the end of 2011. While this made the folks at the EU signing the bailout checks happy, it should be noted that Lisbon was only able to hit that number because it moved all pension funds held by banks into government coffers.

The European Commission estimates Portuguese government debt will "stabilize" at 112 percent of GDP in 2013 after reaching 111 percent in 2012. It was 101.6 percent last year and 93.3 percent of GDP in 2010. One of the reasons that amount keeps getting bigger is that the economy keeps getting smaller. Prior to 2010 the GDP had expanded by less than 1 percent a year for the preceding decade. Last year it shrank by 1.5 percent. For 2012 it is expected to drop 3.3 percent. This may also be optimistic. Portugal's biggest trading partner is Spain.

Portugal is next on everyone's catastrophe watch list because its borrowing costs are so high. Currently it has to pay 12 percent interest to borrow money for 2 years. This is actually an improvement. Three times in the last eight months it was more than 20 percent.

Let the good times roll.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald,, CSO, and Boston Magazine.