Editor's note: Gayle Allard is an economist at the IE Business School in Spain and an expert on the labor market. Read a version of this story in Spanish
Madrid (CNN) -- The events of the past few weeks have made increasingly probable what was once considered impossible: Greece may exit the euro.
The country, which is in its fifth year of recession, has recently proved ungovernable and has a debt it can probably never repay despite bailouts, may find itself forced to default and reissue its own currency. The question now tormenting markets is -- will Spain follow the same path?
No one would argue that Spain is in good shape. Entering its second year of recession with unemployment soon to pass 25% and youth unemployment above 50%, Spain is making a valiant effort to meet the eurozone´s demands for fiscal austerity.
The surprise state intervention in Bankia, a huge Spanish savings bank heavily exposed to the overinflated property market, will put additional strain on the budget and has sent markets into a frenzy. Spain´s risk premium has soared five interest rate points above that of Germany, and there have been further downgrades by rating agencies.
All of this makes already tough deficit targets even more elusive, and in the short term chokes off any remaining hopes for growth and an exit from the downward economic spiral.
But what outside analysts often ignore is that this bleak scenario hides some impressive successes. Spain entered the crisis with one of the lowest public debt figures in the eurozone and still has a smaller debt/GDP ratio than Germany despite its rapid rise.
Spain's conservative, diversified commercial banks have not yet needed a major bailout, and they have spent four years provisioning against the eventual collapse of real estate prices. The chronic current-account deficit has fallen by half, and export growth is strong. Unit labor costs have declined steadily for two years.
Spain last year handed a huge electoral win to a government that promised only austerity and unpopular reforms, hence voting for austerity rather than against it. In February, the government unveiled a reform of the rigid labor market which was the most radical in postwar Europe, and the only public response was a call for a general strike that met with a tepid response. Spain's indignados, who were actually the precursors of the Occupy movement, have continued a peaceful and dwindling protest over the crisis, without concrete proposals.
There is still no violence in the streets, no calls to leave the euro or repudiate the debt, no government defiance of eurozone demands. It would be difficult to find a more model patient for the bitter medicine being administered by eurozone leaders.
So why are markets continuing to drive up Spain´s risk premium? Foreign analysts appear to toss Spain into the Greece "bag" for two reasons: either they overlook the still-acceptable public debt levels and claim it will veer out of control; or else they believe the banking system will need a huge bailout due to bad debts left over from the housing boom.
The first point is simply misinformation. The second assumes that the Bankia intervention was only the tip of the iceberg and that there is much more is to come. No one knows whether this will prove to be true, but the Spanish banking sector has been through European stress tests and its government is now striving to bring remaining toxic assets to immediate light once the situation has been evaluated by international management firms. If all the information is not in the public domain today, it soon will be.
What other economic dangers are there for Spain? The productive economy is still struggling to regain competitiveness. Declining labor costs and the labor market reform will help, but it will take time. It may be a year or more before the effects of the more flexible labor market will be felt. Private debt levels are higher than in much of Europe, and the country is in the throes of a slow, painful deleveraging process. Housing prices have only fallen by 27% after rising more than almost anywhere in Europe, and a further 30% decline may be needed, if the baseline is their long-run price/income ratio. This will continue to dampen consumption and detract from future growth.
The crisis in Spain will not end tomorrow. But the country does not deserve the battering it is taking on financial markets. Spaniards are proud to be in the euro, willing to sacrifice to meet the targets, embarrassed to even be considered bailout material.
With a better growth scenario or supportive markets, the Spanish could probably endure the crisis on their own. For a country that has taken the proverbial bull by the horns and followed eurozone rules, persistent market attack leaves it with only one hope -- immediate support from its eurozone partners.
Europe has been debating the issue of "support" in various guises for the peripheral countries -- that's Spain, Ireland, Portugal, Greece and Italy -- for many months. Massive intervention form the European Central Bank, Eurobonds, greater fiscal transfers and other proposals have been ruled out so far in favor of unbending fiscal austerity.
Europe´s swings between indecision and inflexibility have prolonged Greece´s agony and now threaten hopes of recovery in countries like Spain.
However, much of this discussion is losing relevance by the hour. The bottom line for Spain is no longer its economic indicators or its prospects for recovery, but rather the integrity of the euro. Delayed and insufficient responses by eurozone leaders have turned the crisis of Greece, which represents less than 2.5% of eurozone GDP, into a market storm that could engulf not only Spain and the rest of the periphery, but the world financial system.
The exit of one small country from the euro opens a fissure in the eurozone structure that makes contagion the only rule of the day. The outcome could be a banking and financial crisis of enormous dimensions and a new global recession.
Whether or not Spain is like Greece, a Greek exit and contagion could shut off any hopes of economic stability. Unless the eurozone´s leaders find a decisive, workable plan within the next few weeks or days, the crisis could bring down not only Greece, Spain and other peripheral countries, but also the European dream of unity.
The opinions expressed in this commentary are solely those of Gayle Allard.