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Will Spain and Italy follow in Greece’s footsteps?

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Syriza’s win could build political pressure to cut austerity measures across Europe

Greece’s new government and its anti-austerity campaign could lead other European countries like Spain and Italy to exert political pressure for a cut to austerity measures.

Europe (VGK) is weakening, as ample evidence attests in the economic states of Greece, Italy, and Spain. For more on these economies, read A guide to investing in the PIIGS nations and Italian and Spanish spreads widen.

Like Greece (GREK), Spain (EWP) and Italy (EWI) too have been financially rescued by the European Central Bank and other interests. In return, the two countries have also had austerity measures imposed to which they must adhere as conditions of the financing arrangements.

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Could Spain and Italy share anti-austerity sentiment?

It’s possible that the election of the anti-austerity Syriza party in Greece may set a precedent for Spanish voters. Spain’s output has shrunk by about a quarter since becoming burdened with austerity measures. One out of every two young people is without a job in Spain, where the youth unemployment rate stood at 53.5% in November 2014.

The country’s Podemos party is known for challenging economic and political conventions across Europe.

The situation in Italy is bad as well, with youth unemployment there hitting 43.9% in November 2014.

The yield curve tells a different story

Yet, the long end of the yield curve in both Italy and in Spain are actually down, implying that the markets aren’t terribly concerned about a spillover effect. If the perception was that Spain and Italy might follow the Greek example, yields would rise. Investors would become wary of the countries’ economic future, and expect a higher rate of return for the perceived additional risk of investing there.

Greece’s disregard for the austerity measures imposed by its creditors may lead some of them, especially Germany (EWG), to think again before extending further loans to the country. If Greece doesn’t make any more progress in reforming its economy and balancing its budget, it may be forced out of the Eurozone and made to give up the euro as its currency. That’s if it doesn’t decide to leave of its own accord, first.

Is a Grexit in the cards? We’ll look at this in the next part of this series.

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